Lower inflation for older Australians

Selected Living Cost Indexes

• Alternate inflation measures: The Bureau of Statistics has found that the living cost index for Age pensioners rose by 0.1 per cent in the September quarter to be up 1.9 per cent over the year. The broader Consumer Price Index was up by 0.5 per cent in the quarter and up 2.3 per cent over the year.
• US rates decision: The US Federal Reserve hands down its interest rate decision at 5.00am (AEDT) on Thursday. The result has broad implications for financial markets including shares, currencies and interest rates.

What does it all mean?

• When it comes to measuring inflation or price changes in the economy, generally people view the statistics with some scepticism. No matter the result, most people tend to believe that prices are rising by more than the published data asserts. That is just the normal human reaction – you tend to recall the goods that have become more expensive, but tend to less easily recall the goods that have become less expensive.
• Overall, inflation is low in Australia. The consumer price index indicates that prices are up 2.3 per cent over the year with inflation running at a 2 per cent annualised pace over the past six months. “Underlying” inflation is around 2.4 per cent. Inflation is in the Reserve Bank’s 2-3 per cent target band and therefore interest rates are going nowhere.
• According to the latest living cost indexes from the ABS, employees and age pensioners are doing best, experiencing annual inflation of 1.9 per cent. Inflation for “Pensioner and Beneficiary” households is 2.1 per cent, inflation for “Self-funded Retiree” households is 2.2 per cent and inflation in “Other Government Transfer Recipient” households is 2.3 per cent.
• Inflation is by no means “dead” but businesses now face competitive challenges across suburbs, states and across countries. It would be a bold business-owner that simply lifts prices when experiencing higher costs. First, the business-owner would look to cut costs elsewhere or boost productivity or efficiency. It is too easy for consumers to compare prices at competing businesses or to purchase goods online.
• If inflation stays lower for longer, then interest rates will spend more time at generational lows. For efficient businesses, especially those firms with an element of ‘market power’ in setting prices, the economic environment is very favourable.
• The latest data suggests that real wage growth is occurring again. The latest wage cost index (June quarter) shows wages are up 2.6 per cent on a year ago while the “employee” living cost index is up just 1.9 per cent over the year to September.
• The US Federal Reserve Open Market Committee (FOMC) meeting is important for traders; less important for longer-term investors. The meeting will make a decision on winding up the current period of quantitative easing (QE: effectively printing money). The FOMC may also provide some hints about when the period of super-low rate settings (federal funds rate between 0-0.25 per cent) will end.
• The US economy is doing well, so QE has run its course. But inflation is still low, so there is no rush to lift rates. A healthy economy has “normal” interest rates. So if the FOMC signalled rate hikes sooner, not later, it would cause short-term angst, but the ‘big picture’ story is more positive.

What do the figures show?

Selected living cost indexes:

• The ABS has released the following living cost indexes data for household types in the September quarter:
• Pensioner and Beneficiary households; up by 0.2 per cent in the quarter and 2.1 per cent over the year.
• Employee households; up by 0.4 per cent in the quarter and 1.9 per cent over the year.
• Age pensioner households; up by 0.1 per cent in the quarter and 1.9 per cent over the year.
• Other Government Transfer Recipient households; up by 0.3 per cent in the quarter and 2.3 per cent over the year.
• Self-funded Retiree households; up by 0.5 per cent in the quarter and 2.2 per cent over the year.
• For reference, the Consumer Price Index rose by 0.5 per cent in the quarter and 2.3 per cent over the year.
• The Australian Bureau of Statistics releases “Selected Living Cost Indexes” each quarter. As different groups in the community have different spending preferences, it naturally applies that they experience different price pressures.
• The data assists in assessing the outlook for retailers and consumer spending more generally. The ABS says that the living indexes attempt to answer the following question: ‘By how much would after-tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in the base period?’
• Inflationary pressures are well contained in Australia – and for that matter, across the globe. Interest rates are likely to remain steady for around a year. Retailers are being forced to focus on productivity, cost cutting and marketing strategies to maintain market share and boost sales.
• The Federal Reserve monetary policy decision has broad implications. For instance, if the Fed emphasises low inflation, suggesting rate hikes are some way off, then the US dollar may ease, boosting the Aussie dollar, commodity prices and equities markets.
• CBA’s FX strategy team have noted: “We do not expect any material change in the FOMC’s forward guidance on the funds rate at this meeting. However, the risk is that the Fed emphasises the rising threat of disinflationary pressures (strong dollar, benign wage growth, softer global growth) which could push the US dollar below its 40-day moving average.”

What is the importance of the economic data?

• The Australian Bureau of Statistics releases “Selected Living Cost Indexes” each quarter. As different groups in the community have different spending preferences, it naturally applies that they experience different price pressures.
• he data assists in assessing the outlook for retailers and consumer spending more generally. The ABS says that the living indexes attempt to answer the following question: ‘By how much would after-tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in the base period?’

What are the implications for interest rates and investors?

• Inflationary pressures are well contained in Australia – and for that matter, across the globe. Interest rates are likely to remain steady for around a year. Retailers are being forced to focus on productivity, cost cutting and marketing strategies to maintain market share and boost sales.
• The Federal Reserve monetary policy decision has broad implications. For instance, if the Fed emphasises low inflation, suggesting rate hikes are some way off, then the US dollar may ease, boosting the Aussie dollar, commodity prices and equities markets.
• CBA’s FX strategy team have noted: “We do not expect any material change in the FOMC’s forward guidance on the funds rate at this meeting. However, the risk is that the Fed emphasises the rising threat of disinflationary pressures (strong dollar, benign wage growth, softer global growth) which could push the US dollar below its 40-day moving average.”