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CPI at 1.7% reflects economic weakness

Australia’s headline inflation rate, the Consumer Price Index (CPI) rose 1.7% on an annualised basis in 2015. This was exactly the same as the annual rate measured in December 2014, essentially showing an economy in which prices growth is modest at best and well within the bands set by policy makers.

The chart below shows Australia’s CPI on a quarterly and year-end basis.

Fig16

To go straight to the dashboard and take a closer look at the data, click here.

The December quarter of 2015 saw the inflation rate at just 0.4%, a marked rise from the 0.1% recorded in the prior quarter and above the 0.3% recorded in the December quarter of 2014.

While the inflation rate has limped along over the last year, suggesting some softness in the general Australian economy, it is always useful to compare that with Gross Domestic Product (GDP), the measure of the growth in the actual economy. Growth in economic activity does not have to correlate to prices growth, although there is a relationship between the two.

Australia’s GDP grew 2.5% for the year-ended September 2015 (December quarter data is due out shortly). That result, also within policy targets saw a lift from the prior quarter but was 0.3% lower than in the September Quarter in 2014. This is displayed in the chart below.

Fig17

To go straight to the dashboard and take a closer look at the data, click here.

Examining the contributions to growth, we find that on a year-end September 2015 basis, the economy is little changed, but it does appear to have altered in ways that should flow through to higher pricing (measured in the CPI) in coming months.

As the chart below shows, consumption expenditure rose from its 1.3% contribution to annual GDP in the year-ended September 2014, to 1.4% YE September 2015. New dwellings experienced a 0.2% increase and other measures were largely stable or very modestly improved. The main detractor was inventory, which took a net 1.1% off GDP, implying that inventory management has tightened considerably, doubtless as a response to reasonably tough pricing conditions.

Fig18

To go straight to the dashboard and take a closer look at the data, click here.

As many in the forestry and timber industries can attest, there is at the moment plenty of opportunity to do work, but few opportunities to extract higher prices for that work. The latest economy wide data seems to suggest that’s a national problem and not something exclusive to our industries.

 

Posted Date: March 4, 2016

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