Price growth subdued (except for housing)

Consumer price growth is still slowing, with a rise of just 0.4% during the June quarter, slowing annual headline inflation to just 1.0% for the year ended June 2016.

Underlying inflation was 0.5% for the June quarter, bringing annual underlying price growth to 1.5%. This is well below the RBA’s target 2-3% band.

Fierce retail competition has caused almost negligible goods price growth, which have risen in price by only 0.3% for the year ended June 2016, compared with the 2.0% rise in prices for services over the same period.

For example, food prices deflated by 0.3% during the June quarter. Competition, rather than inadequate demand, has pushed the price down for all food groups other than fruits and vegetables. International entrants, independent grocers, and the growing online food market have all contributed to the intensified competition for Australia’s grocery appetite.

Telecommunications services and audio-visual/computer equipment followed a similar pattern to food, with price deflation (7.5% and 1.1% for the June quarter, respectively) attributed to fast-paced technological progress and intensifying competition, rather than a fall in demand for all things technological.

While clothing and footwear price growth bucked the trend, rising sharply by 2.0% during the June quarter, annual inflation was, in fact, negative at -0.2%. The short-term rise in prices is likely due to new seasonal items becoming available for sale, while the longer term trend for apparel is characterised by a number of international fashion entrants driving prices down further competition in Australia’s major cities.

Low consumer price growth has been reflected in weak wage growth, a story not unique to Australia. A strong build up in supply side capacity combined with more subdued demand has failed to create enough pressure in labour markets to lift wages.

Wages in Australia have been rising slowly, but mainly alongside productivity growth. This means that unit labour costs remain essentially the same and very little cost-push inflation exists for Australian producers.

price growth

In stark contrast to the weak wage and price growth across the economy is asset inflation, including the strong growth of Australia S&P/ASX 200 index, by 6.9% over July. The latest surge does not appear to reflect a rise in dividend earnings, rather a growing demand for sharemarket assets as a response to the low interest rate environment.

Housing prices are also growing strongly, at 0.8% over July nationally, driven primarily by price growth in Sydney and Melbourne (1.3% and 1.1% respectively). While the rate of housing price growth for July was the slowest seen since September 2013, the heat in Melbourne and Sydney housing is far from over.

The Reserve Bank cut rates again this month, assessing that the Australian economy required additional stimulus  – the very weak general inflation gave them the permission to cut rates again; but the continued asset price inflation that low rates are facilitating will need to be monitored.

David Rumbens is a Deloitte Access Economics partner and co-author of our Weekly Economic Briefing.

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