Encouraging Signs that Inflation is Cooling
PUBLISHED
2023-03-01
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While the 0.5% growth figure for the December quarter and 2.7% estimate for all of 2022 was on forecast, the tantalising bit of economic data yesterday was the sharp month on month fall in inflation in January.
The Australian Bureau of Statistics monthly inflation indicator came in at 7.4%, down noticeably from the surprise 8.4% reading in December, the first clear indication that we have seen of those pressures easing in the current bout of inflationary conditions. It will make the Reserve bank a bit more wary at its March meeting next Tuesday to lift rates by a mooted 0.50% - the increase looks like being 0.25% for another month.
The ASX-200 rose and then settled back and eventually closed down less than 0.1% on the day while the Aussie dollar slid in value and then regained the 67.50 US cent level in afternoon trading.
The 0.5% quarter on quarter GDP growth was lower than the forecast estimate of around 0.8% as rate increases finally saw the economy to cool and consumers slowed their purchases of discretionary goods and used up more of their savings.
But that didn’t stop them spending heavily on eating out, drinking and enjoying a fairly dry summer compared to a year ago.
And while some economists made a big deal of the 2.1% quarter on quarter rise in the broadest of wage measures, compensation of employees (COE) - that was down from the much larger 3.2% rise in the September quarter.
And while the solid December increase saw a through the year rise of 10.4% - the largest since the third quarter of 2007, there was a clear sign of easing with the ABS pointing out that the 2.1% rise included much of the one-off national wage rise.
"The continued strength was underpinned by the tight labour market in the December quarter. The unemployment rate remained at historical lows, job vacancies were elevated and wage rates grew as competition continued for skilled workers,” The ABS said.
"This quarter also saw the introduction of the Fair Work Commission’s 2021-22 minimum wage decision that impacted the aviation, tourism and hospitality industries, further contributing to growth.”
And it’s no wonder COE rose at the fastest rate in 15 years - the country has the tightest labour market in decades and the highest number of people employed, near record job vacancies and ultra-low unemployment. COE had to rise strongly and all the talk about a wage-prices spiral in media and business commentary is its usual misleading self.
The slowing in COE in the quarter from September also supports the slowing in wage and salary growth in the quarter shown by the Wage Price Index - which slowed to a quarter-on-quarter rate of 0.8% from the revised 1.2% in the three months to September.
The WPI rose at an annual 3.3% and Average Weekly earnings in the year to November were up 3.4% - a long way from the headline grabbing 10.4% rate.
The partial inflation report for January does however suggest that inflation has peaked, but we know from readings in the US and Europe, its sticky and there will not be a straight line drop as many economists had been suggesting earlier in the year after a peak was found.
It would seem local investors refused to take the bait of the slowing pace of growth in costs, mindful as they are of the US experience this year with a sudden halt to the drop in inflation and small rises in costs in some areas of the American economy.
The 2.7% through the year rate was right on the RBA forecast in its February Statement of Monetary Policy.
Katherine Keenan, ABS head of National Accounts, said in Wednesday’s statement that final consumption and net trade were the major drivers of GDP growth (as the current account data suggested earlier in the week).
"The 0.4 per cent rise in total consumption and 1.1 per cent rise in exports were the primary contributors to GDP growth in the December quarter.
"Continued growth in household and government spending drove the rise in consumption, while increased exports of travel services and continued overseas demand for coal and mineral ores drove exports," she said.
The household saving to income ratio fell for the fifth consecutive quarter (from 7.1% to 4.5%, its lowest level since September, 2017).
Gross disposable income fell in the December quarter as growth in total income payable outpaced the increase in total gross income (thanks to rising interest rates on home loans and falling real wages).
This was despite the strength in compensation of employees and interest received on deposits (from rising interest rates).
Household spending rose 0.3% in the quarter and added 0.2 percentage points to GDP. Growth was driven by spending on Food (up 2.4%), Hotels, cafes and restaurants (up 1.6% with sales hit a record level in January this year, according to the ABS) and Transport services (up 5.7%).
"After four quarters of strong growth following the Delta-variant lockdowns, growth in household spending softened in the December quarter. Spending on discretionary services drove the rise in household consumption, however growth markedly slowed in comparison to the September quarter," Ms Keenan said.
The GDP Implicit price deflator (IPD) rose 1.6% in the December quarter and 9.1% through the year. Domestic prices grew strongly, up 1.4% for the quarter and 6.6% through the year. This was the strongest through the year growth in domestic prices since the March quarter 1990, the ABS said.
The terms of trade rose 7.2% through the year, driving real gross domestic income to 4.4% through the year. This lifted the purchasing power generated by real GDP.
Nominal GDP rose 2.1% in the quarter, up from the 1.2% rate in September but half the rate in the March and June quarters.
Overall, nominal GDP jumped 12% in 2022, one of the largest yearly rises for a while and helps explain why tens of billions of dollars in extra tax income has been pouring into the federal and state budgets - even if the stamp duty tap has been turned off because of the slide in house prices.
National Australia Bank economists said the economy is now 7.2% above its pre-COVID level.
"The activity side of the accounts shows that the economy has remained fairly resilient to the interest rate and price pressures through Q4 but that price and cost growth remains elevated and broad-based.
"The rebalancing of goods versus services spending is now well underway, with the level of goods consumption normalising.
"From here we expect consumption growth to stall, as the impact of higher rates continues to flow through. There are few implications for the near-term path of monetary policy with the RBA already signalling further increases in coming months.
"We continue to see the cash rate reaching 4.1% by May, though the strength of Q1 CPI and resilience of high frequency measures of consumer spending will be key."
And on a core basis - excluding travel costs, the monthly inflation indicator rose 6.7%, compared to 7.4% in December. Excluding items like food and petrol, the core reading was a still too high 7.2% for the year to January.