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Inflation below target – low wages growth at core of failure to spend

At an annualised 1.9%, Australia’s inflation rate for the year-ended September is feeding into concerns about faltering consumption and a possibly slowing economy. The annualised rate was below the 2.1% recorded in the June Quarter and sees inflation fall below the RBA’s target band of 2 to 3% per annum. More importantly, underlying inflation (which removes volatile items like fuel and food) fell to 1.6%. This more stable measure has not been within the target band for three years. Source: IndustryEdge for Timberbiz

Prices growth, measured by the CPI and shown in the chart below, is widely considered to be under pressure because of a continuation of slow wages growth. Despite near full employment conditions, wages growth continues to be slower than the inflation rate.

Australia’s Consumer Price Index (%)

Source: ABS

The implication is that wage earners have less money to spend, especially with historically high levels of household debt. In late October, Morgan Stanley described Australia as ‘leading the world in dangerous debt’. That may be over-reach, but any way you look at it, growing household debt and declining real incomes mean less money to spend on other items.

Australia’s savings rate was also reported to be just 1% of disposable income – an historic low.

The result is that there is little ‘wriggle room’ for the average Australian household, which led leading economists to suggest that the next interest rate move in Australia could well be down. Australia’s headline interest rate, the RBA Cash Rate is already at the historic low of 1.50%.

For those supplying goods and services, it is prices growth (inflation) that drives revenue growth and that makes necessary price increases far easier to implement. It is not just competition from digital communications therefore, that makes it difficult for Printing & Communication paper suppliers to raise prices. The pushback from printers and media buyers comes in part because their own customers are unable to realize price increases in this seemingly endless low-inflation cycle.

The annualised CPI was driven down by falling prices for Furnishings, household equipment and services (-1.2%), which was led lower by childcare costs (-11.8%). Childcare costs fell due to the commencement of a new Federal Government Child Care Subsidy. Telecommunications equipment and services were also negative in the September quarter (-1.5%).

The result of 0.4% growth in the Consumer Price Index (CPI) in the September Quarter was also below commentator expectations.

The CPI is collated and reported by the Australian Bureau of Statistics. The September Quarter marked the 70th year of the ABS’s measurement of the CPI.

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