Today brings the Consumer Price Index data for the December quarter and despite all the thousands of words written about it, the report won’t have any impact on interest rates or Reserve Bank thinking.
Unlike the US and Europe where either deflation (Europe) or disinflation (the US) are emerging as continuing worries for markets and central banks, Australia’s continuing level of modest infllation will be seen as a boon.
It’s likely the CPI will show a small rise in headline inflation because of the impact of the weaker dollar and higher fruit prices.
That will see the underlying rate at 2.3% for the year (perhaps a touch more), with a final quarter headline reading of around 0.4% to 0.8%, according to most estimates.
The expected annual rate will be around the 2.4% seen in the year to June 2013, and also similar to the 2.2% rate for calendar 2012.
The National Australia Bank reckons the quarterly reading will be 0.4% and the annual rate 2.4%.
"This would be the fifth successive outcome in the bottom half of the RBA target range. Subdued wages growth and weak domestic demand continue to keep core inflation well under control. Although the AUD was 8% lower, on average, in the second half of 2013 than the first half, it is unlikely to have had a significant effect on consumer price inflation in Q4," the bank said.
The AMP’s chief economist, Dr Shane Oliver has a similar view.
He said last weekend that we should "expect December quarter inflation data (Wednesday) to remain benign with a slight fall in petrol prices and seasonal weakness in health and education costs holding the headline CPI down to 0.3% quarter on quarter and 2.3% year on year.
"Underlying inflation is expected to be 0.6% quarter on quarter or 2.3% year on year. If we are right and inflation remains at the low end of the RBA’s target range then it will provide plenty of scope for the RBA to keep rates low, albeit it will unlikely be enough to justify another rate cut," Dr Oliver wrote.
As the NAB and other economists continue to point out, the weakness in the labour market tells us that inflation wage pressures are non-existent (wage growth is easing and has been for more than a year).
December’s jobs report (released last Thursday) confirms that employment fell sharply in December, making 2013 as the worst year for jobs growth since 1996.
Dr Oliver said that, "Were it not for the continuing slide in the participation rate, which is largely driven by retiring baby boomers, unemployment would now be a lot higher – in fact at 7.1% if the participation rate had remained at its 2011 average level.
"However, while the jobs numbers are bad the labour market is always a lagging indicator and reflects the soft economic conditions and bleak outlook seen around mid-last year."
But he and a couple of other economists remind us that employment data is a ‘lagging‘ indicator in that they show jobs being added after that happens. Dr Oliver says that with housing and residential construction continuing to improve and retailing growing (4.1% annual in November against 3.2% in January and less than 2% mid year), jobs growth will appear in a few months’ time, well after it has happened, perhaps around mid-year.
The RBA expects this modest rate of inflation to continue for much of the year, perhaps picking up a bit towards the final quarter, or in early 2015.
Across the Tasman and the stronger Kiwi economy could get an interest rate rise as early as next week, if some economists have their way after a sharper than expected rise in December quarter inflation.
On the face of it, the 0.1% rise in the CPIN (for an annual rate of 1.6%) shouldn’t produce any fears, but the Reserve Bank of NZ had previously forecast that the CPI would fall 0.2% in the quarter for an annual rate around 1.3% to 1.5%. Most economists had factored in a small fall as well, following the lead from the central bank.
The next Reserve Bank announcement on interest rates is due on January 30. Before yesterday’s data, most economists had been expecting the first rate rise – from the current historic low of 2.5% – to be in March. Now some, led by the ANZ and Westpac, want a rise next week.
Driving NZ costs higher were a combination of factors, but the most worrying for economists was the continuing surge in construction costs as the hoime building booms in Auckland and other cities, and the rebuilding of the Canterbury (Christchruch) area accelerates.
Westpac chief economist Dominick Stephens said that while most of the surprise in the inflation figures was due to higher airfares, household items and recreational goods, suggesting the effect of a high New Zealand dollar was not being passed through, of more concern was housing-related inflation.
He said that construction costs "purchase of new housing", rose 1.1% in the quarter and to be up 4.7% in the year.
He said rising building costs are affecting the whole country, not just Canterbury.
For investors that should mean a small red flag over Fletcher Building which is the single biggest beneficiary of the boom across the Tasman.
It will pay to watch what it says when it releases its interim report next month. It was confident last year, especially at the AGM, and saw more upside from NZ than from Australia.
The NZ inflation report hit the value of the Aussie dollar compared with the Kiwi. The Aussie fell to under $NZ1.06, down two cents. Parity looms if NZ rates rise next week, or in March.
