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Sunday, 29 July 2018

Live by the supply shock...

Inflation gamechanger

I was excited to be invited to do the Business Insider Devils and Details podcast again a couple of months ago; all the more so given the hugely impressive alumni of the show. 

In recent weeks I learned a lot from listening to Justin Smirk of Westpac's deep-dive on the labour market, where he explained how and why how female employment growth has usurped that of males of late, as well as his in-depth insights on inflation and interest rates.

Last week we saw another very soft inflation figure, with the underlying inflation rate once again nestling below the target 2 to 3 per cent band.

What little consumer price inflation there has been has hardly been a result of rising wages and strong demand; in fact, most of the private sector measures have been very weak. 

Instead most of the inflation has been seen in spheres heavily influenced by the government: childcare costs, education, utility prices, and smokes, for example. 

High voltage

Since 2011 there has been a power surge in electricity price inflation impacting all of the major capital cities, and this has been a significant contributor to higher bills for households and consumer price inflation. 

However, Smirk highlighted in a note this week that although it had previously been thought that higher utility bills would continue to pressure household budgets, government intervention has already eased gas price pressures.

Meanwhile a surprise ramp up in renewables energy generation and investment plus government intervention in Queensland is leading to a collapse in electricity prices. 

The ACCC released a blueprint to reduce electricity prices earlier this month, too, so expect more of the same. 


According to electricity futures, electricity prices are now far more likely to fall throughout the remainder of 2018, and most likely for the first half of 2019 too.

Smirk sees this as a gamechanger for the inflation outlook. 

Don't expect any of this to be mentioned in the 'pressured household budgets' analysis, though - these typically only look at prices that are rising while ignoring the rest, preferring the shtick that the inflation figures don't reflect the true change in consumer prices (narrator's voice: this is literally what they do). 

Electric shocker

Shane Oliver of AMP has highlighted that excluding goods which tend to see sharp price swings (namely petrol, and fruit 'n' veg) private sector inflation is tracking only at about 1 per cent, and he doesn't see interest rates moving until the middle of 2020.  

Smirk believes that easing housing costs and falling electricity prices will dampen CPI to the extent that the headline rate of inflation won't even breach above 2 per cent for the remainder of this year or next year in its entirety.

Not surprisingly, then, Smirk doesn't see interest rate changes until 2020 either.  

For policymakers it's rather a case of live by the supply shock...