The March quarter’s Consumer Price Index gave us a hint of what might have been had the COVID-19 pandemic not hit, but the data also confirmed that apart from government-driven charges for tobacco and alcohol costs and private health care, the 0.3% quarter on quarter and 2.2% annual reading would have been much lower.
The annual rate jumped from 1.8% in 2019, but that rise was also due to the weak March quarter in 2019 dropping out with its zero reading and an annual rate of just 1.3%.
Quarter on quarter inflation slowed from 0.7% in the December quarter to 0.3% in the three months to March. This current June quarter, it is likely to be well under zero.
COVID-19 had mostly negative impacts on prices in the closing six weeks of the quarter – sending the cost of a wide range of basic supermarket items (toilet paper and hand sanitiser) higher, but the impact of the drought, bushfires and then the wet weather in Queensland saw fresh fruit and vegetable prices, along with meat rise noticeably.
ABS Chief Economist, Bruce Hockman said in a statement: “drought and bushfire related effects impacted prices for a range of food products. Prices rose in the March 2020 quarter for fruit and vegetables (+6.0 percent) and meat and seafood (+2.0 percent).
“There were some price effects of COVID-19 apparent in the March quarter due to higher purchasing of certain products towards the end of the quarter, as restrictions came into effect.
“Most notably, rises were seen in, other non-durable household products (+3.4 percent), which includes toilet paper; personal care products (+2.2 percent), which includes soap and hand sanitiser; and other cereal products (+4.4 percent), which includes rice and pasta.
“More evident effects of COVID-19 are expected in the June quarter CPI.”
Had COVID 19 and the lockdowns not hammered the economy, the Reserve Bank would have taken heart from the rise, even if it was driven by those rises in government charges and food and higher food costs. It would have confirmed the idea of the bank that the economy went through a ‘gentle turning point’ in late 2019 to a rise in growth, spending, and inflation.
No need for a rate rise looms headline though because the RBA’s core measures of the Weighted Median (1.7%) and Trimmed Mean (1.8%) rose an average 1.75% in the quarter. That’s still well under the bottom of the central’s inflation target range of 2% to 3% over time. There’s another big miss so far as inflation is concerned.
The current quarter will see a big fall in oil and petrol prices, along with the cost of childcare, travel and accommodation and housing costs. RBA Governor, Philip Lowe says the June quarter inflation reading will turn down.
“…we are also expecting a significant decline in the June quarter. The large fall in oil prices, combined with the introduction of free childcare and the deferral or reduction in some price increases mean that it is quite likely that year-ended headline inflation will turn negative in June. If so, this would be the first time since the early 1960s that the price level has fallen over a full year. In underlying terms, however, inflation is expected to remain positive.”
Certainly, inflation is not a concern to ratings groups – Moodys reaffirmed Australia’s AAA rating just before the CPI was issued on Wednesday morning, despite a forecast 4.9% contract in GDP over the year to December and more modest 3.7% rise in 2021. That will leave the economy smaller than it was at the end of 2019.
“The credit profile of Australia is supported by the country’s very high economic strength, reflected in its solid and stable growth history, as well as strong growth potential, notwithstanding current challenges posed by the coronavirus outbreak,” Moody’s said yesterday.
“A very robust institutional framework also underpins the credit and offsets potential economic and financial stability risks. Challenges stem from high levels of household debt, which in significant housing downturns can contribute to weaker growth, and a large external liability position.”
Rival ratings’ agency S&P Global earlier this month put its triple-A rating for Australia on a negative outlook because of a “substantial deterioration” in the nation’s finances.
In another report, yesterday S&P Global was gloomy about bad debts but said the support from government and a strong rebound in 2021 would ease the pain.
S&P forecast bank loan losses will increase by six-fold to $29 billion from the lows in 2018-19. It also expects to see house prices fall by 10% as a result of the coronavirus pandemic. (we will get an idea of if that’s to happen on Friday when the Aril house price data is released).
S&P predicted the economic risk to banks will be “substantial but temporary” and claimed there was a one-in-three chance the impact for the sector would be more severe or prolonged than initially modelled. The toughest period will be after government emergency assistance eases.
“A contracting economy, rising unemployment, and weak consumer and business sentiment will impact the asset quality of banks in Australia, in our view,” S&P said in a statement.
“However, we consider that the substantial fiscal and policy support from the Australian authorities and a strong economic rebound during fiscal 2021 (year ending June 2021) should help to limit the rise in credit losses.”
