Today we can take one of our regular trips to a land “down under” and we find that in economic terms there is a lot going on. We can start with the Reserve Bank of Australia and this morning’s policy announcement and here its view on what it is supposed to be targeting.
The CPI inflation rate spiked to 3.8 per cent for the year to the June quarter, largely reflecting the unwinding of some earlier COVID-19-related price declines. In underlying terms, inflation remains low, at around 1¾ per cent.
As you can see this is something of a classic of the genre where Australian consumers are told don’t worry you have to pay more for things because if you exclude the things which have risen the most then everything is fine. However if we look at the Australia Statistics numbers we see this.
The Consumer Price Index (CPI) rose 0.8% this quarter.
That is not unwinding price declines and it follows quarters where we had a 0.6% rise and then 0.9% before it. So they suggest there is an issue.
Australia Statistics also has a go but sadly they fail to explain either how they know something is a “one-off” and also how you can purchase things using their measures.
The Trimmed mean and Weighted median are measures of underlying inflation which exclude large, one-off price impacts. Trimmed mean annual inflation was 1.6% in the June quarter, which has increased from 1.1% in the March quarter.
House Prices
As even the Financial Times is on the case it was no surprise to see this in today’s RBA statement.
Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors.
In the past that would lead a central bank to raise interest-rates in response as we see prices and credit growth rising as well as investors entering the market who are presumably hoping for some easy pickings and profits. Let me mark that and look at the actual numbers.
Australian housing values increased a further 1.6% in July, according to CoreLogic’s national home value index. The latest rise takes housing values 14.1% higher over the first seven months of the year and 16.1% higher over the past twelve months.
Yazz has clearly been on all the playlists for 2021.
The only way is up, baby
For you and me now
The only way is up, baby
For you and me now
If we step back for a moment we can recall that it was policy in Australia not so long ago to take some steam out of the market after a house price boom. Well now things have got a lot worse.
Mr Lawless attributes the lower rate of growth in housing values to several factors. “With dwelling values rising more in a month than incomes are rising in a year, housing is moving out of reach for many members of the community. Along with declining home affordability, much of the earlier COVID related fiscal support (particularly fiscal support related to housing) has expired. ( Corelogic )
The next bit is really extraordinary stuff and the emphasis is mine.
CoreLogic’s research director, Tim Lawless, described the market as strong, but losing steam. “The 16.1% lift in national housing values over the past year is the fastest pace of annual growth since February 2004, however the monthly growth rate has been trending lower since March this year when the national index rose 2.8%.”
So there has been a complete about turn in policy from let’s deal with the housing boom to lets pump up the balloon as fast as we can. The next step will be to emphasise it is slowing when it has to. After all if we switch to an Olympics metaphor even Usain Bolt slowed down eventually.
However Australia Statistics has managed to record one of the biggest housing booms in history like this.
Prices for new dwellings fell 0.1% in the June 2021 quarter. Without the offset from the housing grants, the new dwellings series would have risen 1.9%, reflecting demand driven increases in materials and labour costs.
It is expected that these grants will continue to impact the measurement of new dwelling purchases over the next few quarters as applications are finalised and grants are paid.
If we switch to the numbers in the CPI series I note that in the middle of a price surge their housing category shows a 0.3% rise on the quarter and a 0.2% annual fall.
Looking Ahead
Whilst the RBA tries to downplay inflation dangers I note that the quote below has two of them in it.
Domestic financial conditions remain very accommodative, sovereign bond yields have declined and the exchange rate has depreciated to around its lowest level this year, despite elevated levels of commodity prices.
So the Aussie Dollar has fallen with the trade weighted index which was 65 in February now 61.8 and against the US Dollar it nearly made 0.8 back then and is now 0.74. That is curious when higher commodity prices are good for resources rich Australia and it will benefit from the price rises below.
Preliminary estimates for July indicate that the index increased by 5.5 per cent (on a monthly average basis) in SDR terms, after increasing by 6.0 per cent in June (revised). The rural, non-rural and base metals sub-indices all increased in the month. In Australian dollar terms, the index increased by 7.7 per cent in July.
In terms of inflation though these are yet more rises.
Comment
So far the story is relatively simple in that we have a central bank which has decided it knows better than its predecessors and will ignore both rising inflation and soaring house prices. The latter mostly because it created them with this.
maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent
maintain the target of 10 basis points for the April 2024 Australian Government bond
continue to purchase government securities at the rate of $5 billion a week until early September and then $4 billion a week until at least mid November.
Actually in terms of credit growth it copied the way the Bank of England pumped things up with the “Term Funding Facility”,
But we now also see this.
The recent outbreaks of the virus are, however, interrupting the recovery and GDP is expected to decline in the September quarter.
As that is the priority for central banks these days there ends any chance of a response to higher inflation especially if we note this.
Millions of people have been confined to their homes in China as the country tries to contain its largest coronavirus outbreak in months with mass testing and travel curbs. ( The Guardian)
If you are known as the South China Territories this is a cleat problem and of course Australia is seeing its own lockdowns. So by the time they get around to inflation we will be at stage 4 in my timeline “It’s too late now”
Notayesmanseconomics's Blog 
Hello Shaun,
we live in interesting times.
“Millions of people have been confined to their homes in China ”
who would have predicted that in the early decades of the 21st century we would be like this over what is , in pandemic / plague terms, a relatively mild desease .
In absolute terms its nothing like other major health isses the world is suffering from .
Never let a good crisis go to waste.
Forbin
forbin
“who would have predicted that in the early decades of the 21st century we would be like this over what is , in pandemic / plague terms, a relatively mild desease .”
This debate goes on and on the other side would say its not a mild disease if you are on a ventilator or end up with long covid like Kate Garraway’s husband.
As for house prices I maintain what I said yesterday, low interest rates have pushed house prices and other assets for that matter to high levels.
Whether they have reached a limit is another matter that will depend on how much easing carries on and where interest rates and taxation are going.
At some stage all these borrowings have to be paid back or some one has to take a default.
Countries could dig themseleves out of a big hole but I am not convinced this will happen soon.
Hello Peter,
the effects of the Covid on a few individuals is not in question. That it is of major concern to their close ones is of course felt by every other person who has suffered from other illnesses during this ” crisis” . Is their suffering any less ?
the principle of least harm applies , well I don’t think so , not now. Sure when it started the figures looked grim but even THEN we knew the elderly and vunerable were going die more than the young . Protect them yes we tried . but others were pushed back down the line , mistakes were made .
On a world scale Covid has not killed or injured more than AIDS/HIV for example.
forbin
2nd point
“At some stage all these borrowings have to be paid back or some one has to take a default.”
no , they don’t . not at all .
“Some of the debt being repaid relates to the South Sea Bubble crisis of 1720, the Napoleonic and Crimean wars, the abolition of slavery and the Irish potato famine of the mid-18th century.”
The interest may cause some issue but with rates so low…….. yes, like you I have no fear of them being raised anytine soon , unless its for political reasons, such as Brown selling off our gold to depress the market to spite the Russians.
the last thing anyone in power will do is to allow disorder , for they mybe over thrown, they sorely wish to stay in power .
forbin
Great blog as usual, Shaun.
Slightly off topic, but I notice that the Australian Bureau of Statistics has endorsed the recommendations of a July 2016 report “Increasing the Frequency of Consumer Price Index Expenditure Class Weight Updates” and plans to update the CPI basket annually, instead of every six years. It will also switch from household budget surveys to household final consumer expenditure (HFCE) data as the main source for expenditure weights. There is no question that moving to annual basket updates (something the UK did in 1962) would be an improvement, substantially reducing upper-level substitution bias. One does wonder, though, why the ABS didn’t decide to go Swedish, implementing annual basket updates using a formula that passes the time reversal formula (the Walsh formula in the Swedish case, but the Edgeworth formula is the best), which would virtually eliminate upper-level substitution bias.
The switch to HFCE estimates is a lot more debatable. After all, when the UK started updating its basket annually in the 1960s it saw no need to abandon household budget surveys as its main source of weights. As you are surely aware, the Canadian CPI switched to updating its basket with HFCE weights with its June 2021 update. StatCan also announced that it planned to update its basket annually from now forward. This has to be treated with a bit of skepticism, given that the June update was from a 2017 to a 2020 basket and StatCan told us in February 2013, when it updated the index basket from 2009 to 2011, that it would be updating baskets every two years from now on. That promise didn’t even last a decade before there was backsliding.
The StatCan announcement gave no credit to the ABS, although StatCan was obviously just following the advice of the 2016 information paper from the Land Down Under, which doesn’t show much Commonwealth spirit.
It’s difficult to wrap the brain around economic problems with the Olympics on. The CBC won the broadcasting rights for Canada, and hired the English distance runner David Moorcroft as part of the CBC team covering athletics, along with Canadian decathlete Michael Smith. Moorcroft is a superb commentator, and his intimate knowledge of competitive distance running really helps the broadcasts.
Hi Andrew and thank you
I completely agree that annual updating is the way to go and am a bit surprised in that Australia was waiting for 6 years. We have just learned that a lot can change in one year let alone 6. I wish you well in pushing/persuading Stats Can to do the same.
You are lucky to have David Moorcroft who was a great runner. He was excellent at 1500m and was commonwealth champion but had the problem of Steve Ovett and Seb Coe. Then Steve Cram turned up! Your luck really is out when you are that good but unlikely to make your own country’s team. However he showed his class by breaking the world 5000m record when he moved up a distance. It remained our national record for some time because after those glory years and heights even good athletes ( Jack Buckner was European Champion) could not break it.
Steve Cram has the BBC commentary gig and is also very good. The analysis Michael Johnson apart less so. But I thoroughly enjoyed the silver medal of Keely Hodgkinson in the women’s 800m as I had tipped her for success 🙂
A friend is coaching our main entrant in the women;s marathon so fingers crossed for Steph Davis on Saturday.
STC relies on Dirt, Sheep and Tourists. The last of those is now a relic of a bygone era, so replaced by selling/buying more properties; got to do something I guess.
Good to see all those smiling faces on your photos, actually just good to see those faces!
Hi Jim
I try to take pictures of particular events in Battersea Park. I started with the cricket because it is nice to see it back each summer and they missed out mostly last year. The latest is from a yoga event and I hope they maxxed out the mindfulness as it threw it down for 20 minutes around an hour after I took that picture.
The diesel generators are part of what the “greener borough” will rent the park out to. Pay enough and they do not care…
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