Statement on Monetary Policy – November 2009
Price and Wage Developments
Recent developments in inflation
Inflationary pressures continue to moderate, consistent with the slowdown in the domestic economy, although in underlying terms inflation remains relatively high. Wage growth slowed significantly over the first half of 2009, and upstream price pressures are subdued. The recent appreciation of the exchange rate is also starting to exert downward pressure on inflation in the tradables sector of the economy, and inflation expectations are broadly consistent with the Bank’s medium-term inflation target.
The CPI increased by 1.0 per cent in the September
quarter, to be 1.3 per cent higher over the year
(Table 11, Graph 77). The main contributors to the quarterly rise were price increases for the major housing components, automotive fuel and deposit & loan facilities, which were partly offset by a seasonal decline in pharmaceuticals prices and lower prices for fruit & vegetables and other financial services.
The Bank’s medium-term inflation target is clearly expressed in terms of CPI inflation. However, from time to time the quarterly or annual rate of CPI inflation can be heavily influenced by movements in some prices that are not representative of the broader trend in inflation. This has been the case over the past year, with annual CPI inflation held down by very low quarterly outcomes of -0.3 per cent in the December quarter and 0.1 per cent in the March quarter, reflecting falls over these two quarters of 25 per cent in the price of fuel and 16 per cent in the ABS estimate of the price of deposit & loan facilities.
Accordingly, the RBA staff monitors a range of other measures of inflation to help gauge the underlying trend in inflation. These measures suggest that inflation has slowed in recent quarters from the high rates recorded in 2008, although underlying inflation remains above the medium-term target. The trimmed mean measure of inflation, which downweights the impact of unusual price changes in both directions, showed inflation of 0.8 per cent in the September quarter, while the CPI excluding fuel, fruit & vegetables and deposit & loan facilities rose by 0.9 per cent. Based on a range of measures monitored by the Bank, our assessment is that underlying inflation over the past year was around 3½ per cent, compared with its peak of just over 4½ per cent a year earlier. The large divergence between the estimates for year-ended underlying and headline CPI inflation at present is largely accounted for by the sizeable declines referred to above in the prices of fuel and deposit & loan facilities.
Tradables prices (excluding food and fuel) rose by a modest 0.3 per cent in the September quarter, compared with increases of around 1 per cent in the previous two quarters. Although partly reflecting seasonal effects, this moderation is also due to the effects of the currency appreciation that has occurred since March 2009. Non-tradables inflation increased by around 1½ per cent in the quarter largely due to price increases for housing-related items, though in year-ended terms non-tradables inflation (excluding deposit & loan facilities) has slowed from 5.3 per cent a year ago to 4.1 per cent in September.
Utilities prices rose by 10 per cent in the quarter due to seasonal price increases as well as large additional price rises to help fund the upgrade of infrastructure (Graph 78). Rent inflation remained firm at 1.2 per cent in the quarter, but this has slowed from an average quarterly rate of 2 per cent in 2008. There is some evidence (including from new rental tenancy agreements) to suggest that rent inflation may ease further over coming quarters, although the extent of the moderation may be limited while rental vacancies remain at very low levels. House purchase costs increased strongly in the quarter, although in year-ended terms growth was relatively modest at 1.7 per cent; abstracting from the effects of the First Home Owners Boost, year-ended house purchase inflation is estimated to be around 2½ per cent.
Food prices have fallen in each of the past two quarters, after a period of quite strong growth over the previous couple of years (Graph 79). Fruit & vegetable prices have fallen by 12 per cent over the past six months. Prices for other food items were broadly unchanged in aggregate over the period, after increasing at an annualised pace of 5 per cent over the previous three years. This largely reflects lower prices for fresh foods such as meat and dairy products, offset by an increase in the price of restaurant meals and takeaway food.
Costs and margins
Growth in labour costs slowed over the first half of 2009, largely reflecting an easing in private-sector wage growth. More timely indicators suggest that wage growth has remained moderate in recent months, reflecting the weakness in the labour market.
The wage price index (WPI) increased by 0.8 per cent in each of the March and June quarters, which are below-average outcomes for this series. In year-ended terms, WPI growth slowed markedly to 3.8 per cent, which was its slowest pace in around three years. Private-sector wage growth has fallen to its lowest year-ended rate since 2004 (Graph 80). Most industries have recorded a reduction in year-ended WPI growth, particularly mining. Growth in public-sector wages remained around its decade average in quarterly terms.
Other measures have also been consistent with an easing in wage growth. For example, the national accounts measure of average earnings per employee fell in the June quarter for the second consecutive quarter, to be 1.7 per cent higher over the year. Much of this weakness reflected a decline in average hours worked, with growth in average earnings per hour worked slowing over the first half of 2009, to be 4.2 per cent over the year. Growth in ordinary time earnings, as measured by the average weekly earnings survey, also eased over the first half of the year to quarterly rates of around 1¼ per cent. The average annualised wage increase in new federal enterprise bargaining agreements fell to 3.9 per cent in the June quarter, from more than 4 per cent in the previous four quarters.
More timely indicators suggest that wage growth is likely to remain relatively low in the near term. The Bank’s liaison suggests that a lower-than-usual proportion of businesses expect to increase wages over the next 12 months, although this proportion has increased significantly from earlier in 2009. Business surveys indicate that firms are generally having little difficulty obtaining suitable labour at the moment (Graph 81).
Upstream price pressures remained subdued in the September quarter (Graph 82). Following large falls in the June quarter, preliminary-stage producer prices fell by 1.9 per cent and final-stage prices declined by 0.1 per cent in the September quarter (both excluding oil). At the final stage, import prices fell by more than 5 per cent after a similarly large fall in the June quarter, but remained nearly 8 per cent higher over the year, largely reflecting movements in the exchange rate. Final-stage domestic prices increased by 0.8 per cent in the quarter, with almost all of the increase attributable to rising utilities prices.
Measures of inflation expectations remain broadly consistent with the Bank’s medium-term inflation target, although there is some variation across the different measures (Graph 83). Consumer inflation expectations, as measured by the Melbourne Institute survey, have remained broadly unchanged in recent months at around the average level of the past decade. Measures of longer-term inflation expectations derived from financial markets have also been steady in recent months, at around 2½ per cent. The inflation forecasts of market economists surveyed by the Bank are little changed relative to a quarter earlier, and their two-year-ahead forecasts remain well-anchored at around the mid-point of the target band, as they have since the survey began in 2001. Business surveys generally suggest that inflation expectations have stabilised in recent months at below-average levels, while union officials have revised down their near-term inflation expectations (Table 12).