Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 30 October 2016

Inflationary pressures sooo soft (but rates on hold)

PPI weakens again

It's been a few years now, but there was a theory that runaway inflation post-financial crisis would put a stop to interest rate cuts, and therefore the real Australian economy and its real estate markets wouldn't be able to recover for years. 

It just goes to show how wrong predictions about the future can be, I guess! 

Things may begin to turn in time if the slack in the labour force lessens, but at the moment inflationary 'pressures' remain remarkably soft. 

I took a look at the Consumer Price Index figures for Q3 2016 in some detail here, which showed that core inflation is actually tracking well below the target 2 to 3 per cent range.

For final demand excluding exports, we now find that the Producer Price Index figures rose by just +0.3 per cent in the September quarter. The moderate increase was driven by agriculture and utilities, offset by lower petroleum refining and fuel prices. 

Year-on-year growth for final prices declined to just +0.5 per cent over the year to September. By the way, you can click on the graphics to make them bigger.

Rates on hold

There has been a strong recovery in some of Australia's key commodity prices lately.

Although inflation remains soft - and indeed under the target range - financial markets expect interest rates to be on hold this week (I can't believe it's nearly November 1 already!), although the decision may be a close run call.

Indeed, implied yields on cash rate futures suggest that rates could be on hold throughout 2017 and beyond, albeit with risks tilted to the downside.

Although the official cash rate in Australia is now at a record low, inflation is soft too, and as such the real cash rate isn't quite as low or as stimulatory as you might intuitively expect. 

Let's not get bogged down in the old argument of whether the Reserve Bank has been 'behind the curve' through this cycle (and whether the RBA being apparently comfortable with core inflation of under 2 per cent lessens its inflation-targeting credibility). 

Rightly or wrongly, if I'm reading it correctly - by no means a given! - the rhetoric seems to be that despite inflation under-shooting there will be no further interest rate cuts unless they are forced upon the central bank.


Week ahead

Apart from the Monetary Policy Decision for November on Tuesday afternoon, where I expect the RBA will sit pat, there will be some other interesting news and data this week.

Building approvals are forever unpredictable from month to month, and have defied predictions of a significant slowdown to date. These data will be watched closely, particular the figures for apartment approvals.

The figures for International Trade have been consistently recording deficits over the past couple of years. However, as exploding coal spot prices gradually begin to be reflected in higher export prices, it looks feasible that by early 2017 the monthly deficits could be all but erased, at least until China fires up its production volumes again.