Inflation expectations at a 4½-year high

Consumer Confidence

• Consumer confidence: The ANZ/Roy Morgan consumer confidence rating eased from four-month highs, falling by 1.9 per cent to 117.0 in the week to January 22. Confidence is up 3.4 per cent over the year and well above the average of 113.1 since 2014.
• The inflation expectation 2 years ahead was at 4.8 per cent, a 4½-year high. Inflation expectations have now held above 4 per cent for the past 6 months.

What does it all mean?

• Household confidence has eased from recent four-month highs. But more importantly confidence is still holding well above longer-term averages. Overall household budgets are looking healthy and consumers are in a happy place.
• Interestingly the inflation expectation 2 years ahead was at 4.8 per cent in the past week – a 4½-year high. Inflation expectations have now held above 4 per cent for the past six months. There is no doubt that inflationary pressures have bottomed out and are starting lift.
• The focus now shifts to the December quarter consumer price index released tomorrow. Overall we expect the headline rate of inflation to lift by 0.7 per cent, lifting the annual inflation rate to near 1.6 per cent. We suspect that underlying price measures probably grew around 0.5 per cent in the quarter will annual growth around 1.6 per cent. Should prices move in line with forecasts, the Reserve Bank will maintain its neutral policy stance when it comes to interest rates.

What do the figures show?

Consumer confidence

• The ANZ/Roy Morgan consumer confidence rating has eased from four-month highs, falling by 1.9 per cent to 117.0 in the week to January 22. Confidence is up 3.4 per cent over the year and well above the average of 113.1 since 2014. Four of the five components of the index fell in the latest week:
  • The estimate of family finances compared with a year ago was up from +8 to +9;
  • The estimate of family finances over the next year was down from +32 to +28;
  • Economic conditions over the next 12 months was down from +2 to 0;
  • Economic conditions over the next 5 years was down from +12 to +9;
  • The measure of whether it was a good time to buy a major household item was down from a five-month high of +43 to +39.
• In addition the inflation expectation 2 years ahead was at 4.8 per cent, a 4½-year high. Inflation expectations have now held above 4 per cent for the past 6 months.

What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.