Let’s stop for a moment and think about inflation and monetary policy and what that means for a rate cut next month.
Price changes for the basket of goods and services that make up the consumer price index are driven by a lot of things -- supply and demand dynamics from the private sector, administered price changes or tax adjustments from the Commonwealth, State and local government sectors, weather events (droughts, floods and cyclones) and global influences that, for example, can see the oil price swing wildly.
The stance of monetary policy will not have much, if any, impact on price changes that occur due to tax or government rebate adjustments, a drought, flood or global events. Interest rate settings will, however, affect private sector prices through its influence on supply and demand. This means the various underlying or core measures for inflation are the most useful ones when assessing true monetary policy pressures.
Think of it this way. Will an interest rate hike stem a food price rise that is due to a flood? Or will a rate cut change the geopolitical issues that are seeing oil prices fall? And what about the effect of a tax hike that the government is imposing, say, to restrict spending that is pushing the CPI higher? All of these examples make no sense and in fact it could easily be argued that interest rates should be cut because of a restrictive tax increase that happens to lift the CPI.
Which bring us to this week’s September quarter CPI which rose 1.4 per cent to be above the market consensus and curiously has seen the magnitude of interest rate cut expectations scaled back.
No doubt the RBA is looking over the inflation data to see just how much private sector demand and supply driven inflation (deflation) there is. It will no doubt come up with a more sober and balanced assessment than some of the commentary doing the rounds at the moment.
Let’s help the RBA and have a look at some of the changes in government taxes, fees and charges and other ad hoc price swings that were registered in the September quarter and make an educated estimate of the size of the impact on the CPI.
The introduction of carbon pricing was perhaps the highest profile price influence. According to the Australian Bureau of Statistics (ABS) electricity prices rose 15.3 per cent, gas and other household fuels prices were up 14.2 per cent and new dwelling purchases by owner–occupiers rose 0.9 per cent. All had a heavy influence from carbon pricing. Using a working but very conservative assumption that two-thirds of the price increases were related to the carbon price, the percentage point contribution to the 1.4 per cent rise in the CPI is 0.36 points.
International travel costs rose 6.6 per cent in the quarter and while much of the rise was due to a seasonal spike in prices, the airlines did add to ticket prices to cover for the carbon price. The total contribution from international travel costs was 0.15 points. A working assumption might be that about 0.03 points of that was related to carbon pricing.
In terms of other government influenced prices, the cost of medical and hospital services rose 4.5 per cent in the quarter -- a rise according to the ABS, "mainly as a result of means–testing reforms of the Private Health Insurance rebate effective from 1 July 2012”. This policy change added 0.15 points to the rise in the CPI.
There was an offset to this from a 2.6 per cent fall in pharmaceutical costs, which according to the ABS "was driven by a greater proportion of consumers exceeding the Pharmaceutical Benefits Scheme safety net compared to the June quarter 2012”. This cut 0.03 points off the CPI.
Child care costs rose 2.0 per cent in the quarter. The ABS noted that the rise was offset by a government related increase in the maximum rate of Child Care Benefit (CCB) from 1 July 2012. Overall child care costs have a low weighting in the CPI meaning the CCB rise may have cut the CPI by 0.01 points.
In the quarter, tobacco prices rose 1.1 per cent and beer prices were 0.9 per cent higher. According to the ABS, these rises were "partially due to the effects of the federal excise tax increase from August 2012”. Over all, tobacco and beer price rises contributed 0.05 points to the CPI of which perhaps 0.02 points were due to the excise increase.
Local government property rates and charges rose 5.8 per cent in the September quarter, which contributed 0.08 points to the CPI. This is the normal seasonal rise in council rates but as usual, it had little to do with the strength of demand in the economy.
The sum of these government taxes and charges is 0.60 percentage points of the 1.4 per cent rise in the CPI.
There was also a weather related jump in fruit and vegetable prices. According to the ABS, "the rise in vegetable and fruit prices was mainly due to unfavourable growing and weather conditions”. In the quarter, vegetables prices rose 10.5 per cent while fruit were 9.7 per cent higher. These two items contributed 0.24 points of the 1.4 per cent rise in the CPI.
Petrol prices fell 3.9 per cent in the quarter, due to the fall in global oil prices. This cut the CPI by 0.14 points.
The grand total of all of these events is 0.70 points of the 1.4 per cent rise.
There is probably another 0.1 points or so from the impossible to measure impact of carbon prices on the cumulative price increase on a range of other items due to the rise in electricity prices for business, which means that more than half of the CPI was due to one off or ad hoc events.
All of this is not to say that these price changes should be ignored. Indeed for some of these items there may well have been some price influence from private demand changes. The point is that there are high profile price changes that should not and will not influence the RBA when it judges monetary policy settings.
All of which suggests the RBA will discount to at least some extent the rise in the September quarter CPI when it assesses monetary policy settings in November. As a result, it is still likely to cut rates by 25 basis points as it looks at the growing risks from the global economy.
