The week that was
Inflation yet again shocked the markets on the low side. This sparked a repricing of the risks for interest rate hikes and forced the Australian dollar to plumb to fresh multi-month lows. The headline CPI rose 0.6 per cent in the September quarter for an annual rise of 1.8 per cent. The policy important underlying inflation rate (which removes one-off and erratic price changes from the headline figure) rose by just 0.4 per cent in the quarter for an annual rise of 1.9 per cent. This locked in two years where the RBA has missed its inflation target which is for annual inflation to be between 2 and 3 per cent.
When looking at the economy more broadly, the prolonged slump in inflation should not be that much of a surprise. Afterall, wages growth remains mired at a record low, economic growth has been below trend for five years and the Australian dollar has been over-valued, buoyant in large part, by Australia’s high interest rate structure. Until these circumstances change, it is likely that inflation will remain low.
The week ahead
One of the biggest questions confronting policy makers and market watchers is the health of the consumer. This makes the retail trade data for September next week the key release and after two straight months of decline, most economists are looking for a moderate rebound. The extent of that rebound will be an important guide on household financial well-being.
The ‘real’ retail sales result for the September quarter will be included in the release and it appears that sales volumes went backward in the quarter. This is significant as this figure will feed into the GDP result (released in early December).
The problem for consumer spending is linked to a couple of obvious events – record low wages growth, a jump in costs in other areas of the economy (electricity prices for example) and weak consumer sentiment. Until these dynamic change, retail spending growth is likely to remain under pressure.