Weekly Economic Briefing: Inflation remains low, despite surging power prices

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Inflation remains low, despite surging power prices

Last week’s ABS data showed consumer prices in Australia increased by 0.4% in the June quarter, rising by 2.1% over the year. This was marginally below the consensus forecasts of 0.5% on the previous quarter and 2.2% on a year earlier.

This marked the seventh consecutive quarter of inflation data below market expectations. Annual price growth to June is also back below the RBA’s target range of 2–3% for ‘underlying’ inflation (which strips out volatile components from the CPI), at 1.9%.

The chart below shows that inflation has been muted for a number of years, which is the environment that has allowed interest rates to be cut to their current record lows. Weak wage growth, low imported inflation and strong retail competition have each played a role. Wage growth remains weak despite impressive job creation over the past year or so and soaring company profits, however some slack remains in the labour force, with the unemployment rate stuck at around 5½%.


Chart 1: Annual headline and underlying inflation

Source: ABS cat. no. 6401.0. Underlying inflation series is an average of trimmed mean and weighted median. 

In this environment of very low inflation, though, some non-discretionary consumer prices have actually been rising very strongly. Over the past year, for instance, electricity prices were up over 10%, and fuel prices rose by more than 16%. Indeed, surging electricity prices have been rising faster than virtually any other component of household spending over the past decade. They are around 70% higher in 2018 than they were in 2010, compounding earlier increases in the 2000s. And this increase has dramatically outpaced the equivalent energy price rises seen in many other developed economies (Chart 2). This long-term rise in Australian electricity prices has been driven by rising costs along the electricity supply chain, from generation to transmission to retail. In its final report into the retail electricity market, the ACCC provided strong criticism of regulators and suppliers, recommending a number of reforms aimed at lowering consumer prices

Chart 2: Energy price indices

Source: ABS cat. no. 6401.0 and OECDstat. International energy price indices include gas and other fuels. 

Looking ahead, electricity prices appear ready to take a breather. New generation supply is emerging to support the market, while rising prices are attracting more attention from the Federal Government. Retailers themselves are signalling that prices won’t continue to rise this year at their recent pace. And, anecdotally, some electricity retailers are also offering even greater discounts to retain existing customers in the wake of recent negative publicity.

Slower energy price growth would be good news for consumers. It would also mean that, if we were to take surging power prices out of the equation, overall CPI growth may remain below market expectations for some time yet.

For more information on the Australian brief, please contact co-authors David Rumbens and Jack Mullumby.


UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

  • The price of housing in emerging economies and the West has surged since the financial crisis. According to the Organisation of Economic Cooperation and Development (OECD), house prices in the richer, industrialised nations that make up OECD member states, have risen 26% since the trough in 2009. Emerging market economies have seen far greater increases.
  • In the UK, house prices have risen 37% since 2009. With incomes rising more slowly housing has become more expensive relative to incomes. For homebuyers this effect has been partially mitigated by very low mortgage rates.
  • Financial crises generally lead to sharp declines in asset prices, making housing more affordable. It’s been different this time because central banks set out to bolster asset prices in the wake of the global crisis by slashing interest rates and undertaking quantitative easing. Cheap money has worked its magic, lifting the price of housing, equities and bonds across the world.
  • As a result, house prices in many countries look stretched relative to long-term yardsticks.
  • A standard measure of affordability compares house prices to rents and to incomes relative to long-term averages. At £226,351 the average UK house is almost eight times median annual earnings. The OECD estimates that UK housing is 29% overvalued against incomes and 41% overvalued against rents.
  • The US housing appears to offer better value. Despite prices having risen 45% since the trough in 2011, the OECD estimates that the US housing is 2% undervalued against incomes.
  • Across the 23 industrialised nations studied by the OECD, housing is rated as being most overvalued in New Zealand, Sweden, Australia and Canada. In Australia and New Zealand, which have benefited from Chinese growth, the financial crisis led to a short-lived fall in house prices which was followed by a boom, with prices today 70% and 80% above their 2009 lows. As China’s economy slows, house price inflation in Australia and New Zealand is showing signs of cooling.
  • For those on the lookout for cheap housing, the countries with the most undervalued markets relative to incomes are Japan, South Korea, Germany and Greece.
  • Japan’s experience, however, offers a cautionary tale for those who see housing and land as one-way bets. Despite 17 years of quantitative easing land prices in Japan are just one third of their 1991 peak. House prices are also well below the levels prevailing more than 25 years ago. Just because something looks cheap doesn’t mean it’s good value. Japanese housing has, on the OECD measure, been undervalued against incomes for the last 18 years.
  • Having endured the global economic crisis and their own sovereign debt crises, house prices in Greece, Spain, Italy and Ireland are well below pre-crisis levels. House prices in Greece and Spain are down 43% and 24%, and prices in Italy and Ireland are roughly 20% lower.
  • According to the OECD, Germany is Europe’s most affordable housing market, with housing 13% undervalued against incomes despite recent price rises. But estimating fair value for housing is no science. Germany’s central bank, far from seeing German housing as undervalued, worries that the market is overheating. In its February report the Bundesbank estimated that housing in German towns and cities is overpriced by between 15% and 30%.
  • Discussions on housing valuations tend to focus on national house price indices. But within countries prices vary significantly. National affordability figures therefore conceal big differences within countries.
  • Within the UK, housing in London and the South East is the priciest, with London overvalued by 34% against incomes. That makes London housing as overvalued as the Belgian market which is one of the world’s most expensive.
  • By contrast, houses in most of the other UK regions are undervalued and affordability is closer to levels in Italy and the US. Indeed, housing in Northern Ireland is more affordable relative to incomes than in Germany, which is Europe’s cheapest national housing market.
  • The value in the overall German housing market also masks rapid growth in prices in some cities. House prices in Munich more than doubled between 2009 and 2017 and prices in Hamburg rose 70%.
  • In the US, the tech boom has helped drive a more than doubling of house prices in San Francisco since 2012. Over the same period New York prices rose by just 22%.
  • House prices in emerging market economies, including China, Brazil, India and Hong Kong, boomed in the wake of the financial crisis. In India rapid growth, strong demand and housing shortages have helped lift house prices by a factor of three since 2010. Growth has been less heady in China but prices have risen by 60% since 2010. Activity has slowed in recent years as the authorities have tried to head off a housing bubble by tightening credit conditions and restricting purchases of second homes.
  • Housing has ridden a wave of cheap money in the last decade, pushing prices to new highs. Affordability varies within and between countries. But even for homebuyers in regions with stretched valuations, ultra-low financing costs have helped ease the pain.
  • With the global interest rate cycle starting to turn up, led by the US, the balm of cheap money seems set to retreat. It is hard to see house prices repeating the stellar performance of the last ten years in the next ten.



The FTSE 100 ended the week flat at 7,701.

International economic briefing by Ian Stewart

Economics and business

  • The EU and the US reached a temporary agreement to postpone the imposition of tariffs on cars in a bid to start wider talks on reducing trade barriers
  • The US economy grew at an annual rate of 4.1% in Q2, its fastest rate since 2014
  • Harley-Davidson, the motorcycle maker, cut its profit forecast for 2018 citing a greater than expected impact from rising protectionism
  • China unveiled a fiscal stimulus package to mitigate a slowdown amid trade tensions with the US. The package includes tax cuts and spending measures aimed at expanding domestic demand and supporting investments
  • Euro area PMIs for July suggest that growth will remain weak in the second half of 2018 as manufacturers struggle to adjust to the threat of a global trade war
  • The German IFO index, a key measure of German business optimism, declined for the eighth successive month in July in a sign of slowing growth in the euro area
  • Foreign investors sold a record volume of Italian debt in May over concerns that the new government’s budget will threaten the country’s fiscal outlook
  • The yield on ten-year Japanese government bonds hit its highest level in 18 months, as speculation about an unwinding of Japanese quantitative easing increased
  • The Turkish lira plunged after the central bank kept interest rates on hold despite inflation soaring to 15.4% in June, three times its official target
  • The UK government announced the biggest public sector pay rise in almost a decade for one million workers
  • The UK government proposed tighter controls on FDI deals on the ground of national security concerns in a move widely deemed to be aimed at Chinese inward investment
  • The IMF warned that inflation in Venezuela is likely to hit 1,000,000% this year
  •  President Trump threatened to shut down the US government if Congress does not agree to fund his plans to build a wall at the Mexican border
  • The FT reports that Saudi’s wealthiest families are not investing in the Kingdom as nervousness over Riyadh’s corruption purge exacerbates a fragile business environment
  • Shares in two of the largest social media platforms, Twitter and Facebook, dropped sharply following their announcements of a fall in active users

Brexit and European politics

  • The Times reports that, EU27 leaders are considering arranging an informal summit in September to allow the UK to pitch its Brexit proposal to them directly
  • UK business secretary, Greg Clark, warned that a no deal Brexit would send a “terrible sign” to the rest of the world at a time of growing protectionism
  • UK prime minister, Theresa May, announced that she “will lead the negotiations with the EU” with Brexit secretary Dominic Raab “deputising”
  • Dominic Raab, the new UK Brexit secretary said he was “confident” the UK and EU would reach a “workable solution” on the Irish backstop
  • Deutsche Bank moved almost half its euro clearing activities from London to Frankfurt “to minimise risk” ahead of Brexit
  • The UK NHS is preparing for no deal Brexit scenario by stockpiling supplies, according to the UK health secretary, Matt Hancock

And finally…

  • UK supermarkets sold £287m of alcoholic drinks, more than in any other week on record outside of Christmas and Easter, in the week of England’s World Cup victories against Colombia and Sweden – drinking games

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