Australian Inflation Improves, but Services Inflation Reaches 22 Year High
Economic news and commentary for July 26, 2023
Australia CPI
Australia's CPI increased at the slowest quarterly rate since September 2021, and the annual rate fell substantially. Both signal that there has been some progress in inflation in the second quarter of this year. Australia's CPI grew 0.8% QoQ and 6.0% YoY in June, down from 7.0% YoY in March. This is down from 1.4% QoQ in Q1 2023 and 1.9% QoQ in Q4 2022. Outside of core prices, food and energy prices pretty much canceled each other out in the quarter. Specifically, auto fuel prices fell -0.7% QoQ and were offset by a 1.6% QoQ increase in food prices. Despite the increase in food prices in the quarter, annual food inflation eased from 8.0% YoY in Q1 2023 to 7.5% YoY in Q2 2023.
Core CPI also increased in the quarter which points to broad price pressures continuing to affect the headline figure. However, as we saw in overall CPI, the quarterly increase was the slowest since September 2021 at 0.7% QoQ. The slower gain meant that the annual rate of core CPI inflation fell substantially to 5.8% YoY in June, down from 6.6% YoY in March. This is the lowest since a year ago in June 2022. The disinflation came entirely from the goods side which grew 0.9% QoQ but saw the annual rate drop to 5.8% YoY from 7.6% YoY thanks to base effects. Again, we’re looking at lows not seen since 2021 here. Some major contributors to goods disinflation include pharmaceutical products down -1.0% QoQ, telecom equipment down -0.7% QoQ, and motor vehicles down -0.6% QoQ (the first quarterly decline since March 2020). However, these were offset by a 2.1% QoQ increase in furnishing and household equipment prices.
The force pushing against slower goods inflation was strong services inflation that set records. The 0.8% QoQ increase in service prices pushed the annual rate to 6.3% YoY which is the highest since 2001. Contributing to the rise in service prices were stronger wage growth and increased costs for utilities and rents, rising insurance premiums, and more expensive motor vehicle insurance. Notably, rental price inflation reached the highest since 2009 at 6.7% YoY as the cost of new homes continues to moderate but remains high. Home price inflation in 2021-2022 caused a very tight rental market which put extreme upside pressure on rents over the last two years.
When looking at annual rates and the trend in quarterly rates in the latest release, it does look like progress has been made in reducing elevated Australian inflation. The 0.9% QoQ gain is slightly higher than what was typically normal for the pre-pandemic period, but it is definitely lower than what we have seen in the post-pandemic period. Due to the latter fact, much of the improvement in the annual pace can be pinned on favorable base effects from goods disinflation. When focusing on services inflation, which is what the Reserve Bank of Australia is doing, it is harder to be optimistic. Services inflation is at the highest level in 20 years, and wage growth has not slowed substantially (waiting on June update) which is supportive of services price pressures.
The RBA held firm in July after two rate hikes to end Q2 2023, but it may be lured back into more action at the next meeting due to sticky services inflation. The previous peak in the RBA cash rate was 4.75% first reached in 2010 before the slow descent towards 0.1%. It is very possible that we could see rates back at that level by the end of the year if progress on inflation does not continue.
Still to come…
10:00 am (EST) - US New Home Sales
10:00 am - US State Street Investor Confidence Index
10:30 am - US EIA Petroleum Status Report
11:00 am - US Survey of Business Uncertainty
2:00 pm - US FOMC Announcement
Morning Reading List
Other Data Releases Today
Euro area M1 money supply growth was -8.0% YoY in June, down from -7.0% YoY in May. Household loan growth slowed to 1.7% YoY (from 2.1% YoY) & corporate loan growth slowed to 3.0% YoY (from 4.0% YoY).
The French household consumer confidence index was unchanged in July at 85.
The index tracking past consumer prices fell -5pts to 61, and the index tracking future inflation fell -5 pts to -57.
Canadian business openings haven't been largely affected by high rates so far.
In April, the business opening rate grew to the highest level since March 2022 at 4.9% while the business closures rate grew to the highest since August 2022 at 4.8%.
Australia CPI
Australia: June inflation falls further (ING) - Another decline in inflation should be enough to keep the Reserve Bank of Australia (RBA) on hold at their next meeting, but the helping hand from base effects will grind to a halt after next month, which could set the stage for a further hike in September.
US Consumer Confidence
U.S. Consumers Pickin’ Up Good Vibrations (BMO) - Cushioned by excess savings and a robust labour market, U.S. consumers—the biggest engine of economic growth—are holding up well. Greater exuberance could fuel households to keep spending (though there’s no direct correlation to consumer expenditure). A 25-bp hike is all but locked in at Wednesday’s FOMC announcement, with rates likely to stay elevated for some time.
Consumer Confidence Rises to Two-Year High Amid Strong Jobs (Wells Fargo) - Not since the outset of the pandemic has consumers' assessment of the present situation been stronger than it is today. Meanwhile, amid broad improvement in labor market measures, overall confidence rose to its highest since July 2021, and expectations came up as well.
US
US | Fed set to deliver a 25bp hike in its quest to find a sufficiently restrictive stance (BBVA) - Tomorrow’s policy statement and Powell's comments will likely remain hawkish to keep options open despite recent data pointing to cooling inflation. We will look for signals that challenge or support our baseline view that tomorrow’s hike will prove to be the last.
US Weekly Economic Commentary: Consumer resilience keeps economy growing (S&P Global) - On balance, the takeaway from a relatively full calendar of data this past week is that the US economy continued to hum along in the second quarter and near the US's "potential" growth rate — the pace that can be sustained from the supply side of the economy. The resilience of the economy and what that means for employment, wages, and inflation going forward suggests to us that two more Fed rate hikes will be needed to wrestle inflation back to the Fed's 2% target quickly enough to satisfy Fed policy makers. We expect the first of those hikes at next week's meeting of the Federal Open Market Committee.
Europe
The ECB will choose inflation over the economy at this week’s monetary policy meeting (Saxo Bank) - The ECB will stick to its hawkish bias despite recent Eurozone economic data pointing to a fast deterioration of the bloc's economy. The medium-term symmetrical inflation target framework introduced in 2021 allows the central bank to act forcefully in case of recession. Therefore, the ECB will likely bring the deposit rate to 4% by September or October and start its rate-cutting cycle by the second quarter of 2024.
Eurozone bank lending falls again in June as ECB hikes take effect (ING) - Bank lending to households and corporates remained on a downward trend in June, indicating that the transmission of interest higher rates is not abating. In an already weak economic environment with inflation falling, this makes the ECB debate about hikes beyond tomorrow’s meeting more heated.
CEE in focus: Shifting gears to monetary easing (S&P Global) - Downward-trending core inflation in the first half of 2023 has enabled central banks in the four Central and Eastern European (CEE) economies to focus on reviving domestic demand. Backdoor easing is already under way in Hungary and Romania. We forecast benchmark rate cuts across the region by early 2024, ahead of the European Central Bank pivot expected in June 2024.
China
ASEAN as a China Plus One destination: Current situation and risk outlook (S&P Global) - The strategy of mainland China-based companies seeking to establish production hubs in other countries globally, known as "China Plus One," has attracted widespread attention, with major global companies in the electronics and other industries expanding to Southeast Asian countries such as Vietnam and Indonesia. When the strategy first emerged in the mid-2000s, the motivation was to reduce expenditure by moving production to lower-cost countries, but in recent years companies have pursued this business model to protect their supply chain and export markets against the potential fallout of US-mainland China conflict.
China | Understanding 2023 July Politburo meeting (BBVA) - The 2023 July Politburo meeting analyzed the economic situation and pointed out the policy direction in the short and long term.
Japan
When can the Bank of Japan be confident that inflation is sustainable? (ING) - The Bank of Japan will likely stay dovish for an extended period despite a solid recovery in economic growth and inflation being above target. But we think the BoJ could still adjust its yield curve control policy this Friday.
Inflation
Global | Inflation and Bottlenecks Chartbook. June 2023 (BBVA) - Inflation continued trending down thanks to the base effect and lower commodity prices, while core inflation barely declined. Inflation goods continued moderating while services inflation remain more sticky.
Real Estate
Interest for New Homes Strengthens (NAHB) - Higher interest rates have led millions of existing homeowners with mortgages under 4% to postpone plans to list their homes for sale, and for many prospective buyers, that supply vacuum has left newly built homes as the only game in town. That is the backdrop behind the strengthening of interest for new homes.
Markets
Growth at any price?: Tech investors pay 1999 growth premiums again (DWS Group) - We see similarities to and lessons from 1999 for Tech investors and 1980 for central banks. If Tech investors aren’t more valuation conscious, the risk of losses or a long future period of sub fair returns is high. If central banks retreat from their inflation fight too soon, the risk of inflation reaccelerating and thus cause for higher interest rates shouldn’t be ignored.
Outlook
Persistent headwinds hinder global growth prospects (S&P Global) - While S&P Global Market Intelligence's global real GDP growth forecast for 2023 is unchanged at 2.4%, this masks regional divergence. Growth forecasts for 2023 have been revised markedly upward in North America, primarily reflecting the recent resilience of economic activity. In contrast, the forecasts for mainland China and parts of Europe have been revised down. Moreover, the global real GDP growth forecast for 2024 has been lowered again to 2.4%. The lagged effects of tighter-for-longer financial conditions will continue to weigh on economic activity. Leading indicators remain consistent with global expansion but are losing momentum.
Global Economy on Track but Not Yet Out of the Woods (IMF) - The global economy continues to gradually recover from the pandemic and Russia’s invasion of Ukraine. In the near term, the signs of progress are undeniable. The COVID-19 health crisis is officially over, and supply-chain disruptions have returned to pre-pandemic levels. Economic activity in the first quarter of the year proved resilient, despite the challenging environment, amid surprisingly strong labor markets. Energy and food prices have come down sharply from their war-induced peaks, allowing global inflation pressures to ease faster than expected. And financial instability following the March banking turmoil remains contained thanks to forceful action by the US and Swiss authorities.
U.S. Economic Outlook: Labor market dynamics might need longer to adjust than disinflation suggests (DWS Group) - Recent data on the U.S. economy supports suggestions that the Fed is well on its way towards eventually winning the fight against inflation. The fate of the labor market therefore remains crucial for the outlook on (service ex. shelter) inflation. Sticky wage growth might be the reason why the unemployment rate will overshoot its equilibrium value of 4%.
Research
Decomposing the Government Transfer Multiplier (St Louis Fed) - We estimate the local, spillover and aggregate causal effects of government transfers on personal income. We identify exogenous changes in federal transfers to residents at the state-level using legislated social security cost-of-living adjustments between 1952 and 1974. Each effect is measured as a multiplier: the change in personal income in response to a one unit change in transfers. The local multiplier, i.e., the effect of own-state transfers on own-state income holding fixed other state’s income, at a four-quarter horizon is approximately 3.4. The cross-state spillover multiplier is about -0.7, but not statistically different from zero. The aggregate multiplier, i.e., the sum of its local and spillover components, equals 2.7.
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