The monthly annual CPI for October shows annual inflation eased to 6.9% from September when the annual rate was 7.3%. Including the dip in inflation itself, there are some signals inflation may have peaked, but just as one swallow does not a summer make, neither does one month indicate a trend.
The first caution to note is that the new indicative monthly data – on which the 6.9% outcome is based – is not the same as the more refined quarterly data. Revisions are more likely, though not compulsory.
Here, we can see the average CPI for the eight capital cities, with the annual change shown on a monthly (blue line) and quarterly (red line) basis.
After a year of strong and consistent upwards momentum, even a moment’s relief is welcome. The caution must be however that the monthly data has shown periodic corrections before, only to see the quarterly data series roll over the top of it like a steam roller crushing a small vehicle.
Softening inflation would be very welcome for the central bank, easing the necessity for further doses of interest rate rises. Already, there is speculation the interest rate rises to date have fed into the lower inflation numbers, impacting both actual expenditure and perceptions.
That does not mean further interest rate rises are unlikely. What it does suggest is the pace of interest rate rises may be able to slow, at least a little, especially because the impact of the most recent rises is yet to be felt in the economy, because those rises are yet to have a large impact on most household’s bottom lines.
Moreover, as Greg Jericho observes in the Guardian, most established variable loans are still below the average of all loans. There is a little more headroom left in the national average household account than is displayed by the current home lending rates.
This is potentially good news as Paul Bloxham, HSBC Chief Economist commented “the data suggests that inflationary pressure in Australia remains high but had eased and seems to be past its peak”.
In general, this is supported by other data indicating that retail sales are finally feeling the effect of the RBA rate rises with a modest month on month decline of 0.2% in October. Jericho analyses the data in more detail and comments that the 0.2% “…was significant because as prices are rising, it means the number of things we bought (or the volume) fell significantly”.
Below, we can observe this experience, which appears to support the proposition that the reality of current interest rate rises and the spectre of more to come, is playing its part in cooling consumption expenditure.
The chart shows that since the commencement of lockdowns in March 2020 while turnover (total expenditure) has increased, volume (the number of items purchased) has eased considerably. That makes sense, because the intersection between those two experiences is price. Same value but lower volume equals higher price and that equals inflation.
To understand the importance of household consumption in driving economic growth refer to the article elsewhere in this edition of Statistics Count, on the September GDP.
However, in its role as national economic juggler, the Reserve Bank is still looking ahead and is concerned to stop inflationary expectations in their tracks. It wants expectations to be in accord with its target band of 2-3% for inflation, not the current elevated levels.
In that context, the RBA is forecasting headline inflation to peak at 8.0% at the end of 2022 declining through 2023, to be back within the target band by 2024. Reflecting this outlook, the RBA at its recent meeting decided to increase the official cash rate by a further 0.25% to 3.10%, as we can observe below.
We recommend you read the item in this edition on forecasting, to gain some insight into why even these predictions are so difficult and fraught with danger.
Many commentators are still expecting further rises in the official cash rate next year. As we described at the outset, there is headroom for that to occur, and there may be a need to withdraw consumption further from the economy to achieve the objective.
Meantime, the September quarter GDP data shows the economy easing, which could put the brakes on the pace or extent of further increases.
If inflation has peaked and begins to wind down faster than anticipated, it could be another indicator of the remarkable resilience of the Australian economy.
