Some good news on interest rates and consumer confidence yesterday means the economy isn’t in such a gloomy place as many had thought especially economists, and possibly the Reserve Bank.
With one simple revision, the Australian Bureau of Statistics has given the Reserve Bank more time to consider the future path of interest rates.
As a result we won’t see a rate rise in 2011.
The ABS yesterday revised second quarter inflation lower, suggesting price growth is not as strong as previously expected.
The revision was contained in a paper explaining changes to the method of calculating the Consumer Price Index and adjusting it for seasonal factors.
The new 16th series of the CPI will be released with the September quarter report on October 26. It replaces the 15th series which ended with the June quarter report, released in late July.
The revisions to the important core inflation readings watched closely by the Reserve Bank were done in a comparison of the readings in the 15th and the new 16th series of the CPI.
As a result the second quarter core inflation reading dropped to 0.6% (Series 16), from 0.9% (15th series) reported in late July when the June quarter CPI was released issued.
The core inflation CPI is the one the RBA looks at to get a bearing on inflation.
It consists of two parts, the trimmed mean which was cut from July’s 0.9% (16th) to 0.7% (15th) and the weighted median which fell to 0.5% (16th) from 0.9% (15th).
The annual inflation rates under these measures fell to 2.5% for the trimmed mean (2.7% under series 15) and 2.6% (2.7% under series 15) for the weighted median.
There were revisions under the new method going back through the years.
The Reserve Bank looks at the average of the two, which strips out volatile items and seasonal movements of prices such as petrol, food and other products where there are large rises or falls in prices.
The RBA boosted the seasonally adjusted June quarter annual headline rate to 3.7% from the unadjusted rate reported in July of 3.6%.
The ABS will produce a seasonally adjusted All groups CPI and a non-seasonally adjusted All groups CPI, weighted average of eight capital cities which will remain the official inflation measure. It is not subject to revision.
But the bottom line is that inflation looks a bit better under the new method in series 16 (and looked worse going back through the past couple of years at times).
The news helped push the dollar down to around $US1.025, a fall of nearly 1 USc and adding to the continuing impact of the fears about the eurozone.
Also helping push the dollar lower was news of a surprise rise in consumer confidence.
Analysts had been expecting another gloomy report, especially after the fall in business confidence in September in Tuesday’s monthly report from the NAB.
But consumers are looking up, despite the market worries.
Perhaps it was the solid second quarter GDP figures that helped confidence improve.
After falling to its lowest level in more than two years in August, the Westpac-Melbourne Institute Index of Consumer Sentiment rose by 8.1 in September to a reading of 96.9.
The index fell to 89.6 in August, which was the lowest level since May 2009.
Westpac chief economist Bill Evans said in a statement yesterday that the strong recovery in economic growth in the June quarter and moderating interest rate expectations were behind the improvement.
But despite the rise, the index remains at a weak level overall and is 14.4 points below its reading a year ago.
The September reading was below the neutral mark of 100, meaning the number of pessimists now outweighs the number of optimists.
Mr Evans said he suspected that a more relaxed outlook on interest rates was behind the bounce. He said the Reserve Bank of Australia (RBA) was no longer threatening to raise rates, due to escalating turmoil in the global economy and evidence of a domestic slowdown.
‘‘Concrete evidence of the improved outlook for interest rates came shortly after the August survey when the major banks actually lowered their fixed rate mortgage rates,’’ Mr Evans said.
‘‘While possibly coming as a surprise, this action would have comforted anxious households.’’
The strong recovery in economic growth in the June quarter was also likely to be behind the improvement in consumer confidence, Mr Evans said.
‘‘That development gained particularly wide media coverage and would have boosted households’ spirits.’’
Despite the strong bounce, Mr Evans said respondents remained extremely concerned about the outlook for their own finances.
The component measuring how respondents expect their financial position to change over the next 12 months remains weaker than at any time since July 2008.
The index tracking ‘whether now is a good time to buy a home’ jumped 15.1% to its highest level in two years.
"We continue to expect that the next stage in the Reserve Bank’s policy development will be an actual cut in interest rates. We confirm our expectation that rates will be cut by 25bp’s (basis points or 0.25%) in December.
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