Statement on Monetary Policy – February 2010
Price and Wage Developments
Recent developments in inflation
Recent inflation data indicate that price pressures continue to moderate in line with the Bank’s expectations and the easing seen in capacity pressures. Wage growth has slowed, and the prices of many imported items have recently fallen due to the appreciation of the exchange rate. Further moderation in year-ended underlying inflation is expected in coming quarters.
The consumer price index (CPI) increased by 0.5 per cent in the December quarter, to be 2.1 per cent higher over the year (Table 10, Graph 79). The main contributors to the quarterly increase were a large rise in fruit prices reflecting weather-related supply shortages and an increase in the price of domestic holiday travel. These were partly offset by significant declines in the prices of automotive fuel and audio, visual & computing (AVC) equipment.
Tradables prices (excluding food & fuel) fell by 0.3 per cent in the quarter, reflecting lower prices for AVC equipment, pharmaceuticals and major household appliances (Graph 80). The year-ended rate of tradables inflation was around 2 per cent. This primarily reflected strong outcomes over the first half of 2009, after the sharp deprec-iation of the exchange rate in late 2008 fed into the price of most tradable goods. With the exchange rate having appreciated significantly since early 2009, tradables prices fell in the December quarter and inflation for this category is expected to remain subdued over coming quarters. The reduction on 1 January in the tariff rates charged on motor vehicles & parts and textile, clothing & footwear products is likely to add to the downward pressure on tradables price inflation.
Non-tradables inflation (excluding deposit & loan facilities) was 0.9 per cent in the December quarter and 4.1 per cent in year-ended terms. The current year-ended pace of non-tradables inflation is 1¼ percentage points below the September 2008 peak, reflecting a relatively broad-based easing in inflation pressures. Nevertheless, non-tradables inflation remains ¾ percentage points higher than its average rate over the inflation targeting period. This reflects particular strength in utilities inflation and in rents, notwithstanding some recent slowing in the latter.
CPI inflation can, at times, be heavily influenced by movements in particular prices that are not representative of the broader trend in inflation. In 2009, year-ended CPI inflation was held down by the large falls in the ABS estimate of deposit & loan facilities prices and to a lesser extent by falls in automotive fuel prices. Given the influence that particular items can have on CPI inflation, RBA staff monitor a range of measures of underlying inflation, as well as attempting more broadly to understand the various factors driving the CPI at any point in time. Measures of underlying inflation include some that exclude particular items such as automotive fuel, fruit & vegetables and deposit & loan facilities prices and various trimmed mean and weighted median measures (Graph 81).1 As has been noted previously, typically these measures will provide a range of estimates and there can be no single measure of underlying inflation that is best at all times.2
Overall, the range of measures monitored by the Bank suggests that year-ended underlying inflation was around 3¼ per cent in the December quarter, down from a peak of just over 4½ per cent in the year to September 2008. In quarterly terms, underlying inflation was 0.6 per cent in the December quarter, a step-down from around 0.8 per cent in the previous two quarters, and significantly below the peak quarterly rates of around 1¼ per cent recorded in the first three quarters of 2008. These recent outcomes have been in line with the Bank’s expectations that the slowing in the economy from mid 2008 and easing in capacity pressures would be reflected in a gradual decline in underlying inflation.
The moderation in inflation is also apparent in producer prices. Preliminary-stage producer prices (excluding oil) fell by 0.9 per cent in the December quarter the fourth consecutive fall to be 8.1 per cent lower over the year. Final stage prices (excluding oil) also remained weak, falling by 1.4 per cent over 2009, which is the lowest outcome in the 10-year history of the series. Import prices at each stage of production again fell sharply in the quarter, reflecting the appreciation of the exchange rate. Domestic price pressures were subdued, although prices at the final stage have firmed a little in recent quarters following weakness earlier in the year (Graph 82).
The moderation in wage growth over the first half of 2009 continued into the September quarter, with private-sector wages growing at a below-trend pace. More timely information from business surveys and liaison suggests that wage growth remained moderate in the December quarter, although the recent improvement in labour market conditions may contribute to higher wage growth over 2010.
The wage price index (WPI) increased by 0.7 per cent in the September quarter, another below-average outcome, following growth of 0.8 per cent in the previous two quarters. In year-ended terms, WPI growth eased for the third consecutive quarter to 3.6 per cent. The moderation was driven by slower growth in private-sector wages, which eased to 3.2 per cent over the year to September, the slowest pace since 2002 (Graph 83). The easing was broad-based across industries, and bonus payments have grown at a slower pace than base wages. Growth in public-sector wages remained around its decade average in quarterly terms and has shown no sign of moderating. Other measures such as average earnings per employee from the national accounts, ordinary time earnings and new federal enterprise bargaining agreements also recorded further moderation in wage growth in the September quarter.
Business surveys point to some increase in the rate of growth of labour costs in coming quarters, albeit from low levels, although there is little to suggest that firms are having difficulty obtaining suitable labour (Graph 84). The Bank’s liaison suggests that the proportion of firms expecting to increase wages over the next 12 months has increased from the low levels seen earlier this year, although not to pre-downturn levels.
Forecasts by market economists indicate that inflation is expected to remain consistent with the medium-term inflation target. The median forecast for inflation in 2010 remains in the lower part of the target range, while the forecast for 2011 has increased (Table 11, Graph 85). Medium-term expectations inferred from bond prices have risen slightly recently, to be around 2¾ per cent. The Melbourne Institute’s measure of consumer inflation expectations has been around 3½ per cent since mid 2009, which is modestly above its average level over the inflation targeting period. Business survey measures of expected selling prices remain subdued, despite picking up a little recently.
- The exclusion-based series is the CPI excluding fruit, vegetables, automotive fuel and deposit & loan facilities. The weighted median (city-based) series is calculated using disaggregated quarterly price change data for each CPI item in each of the eight capital cities, rather than using national average data (i.e. it is based on 720 price changes rather than the 90 national price changes). The trimmed mean (annual distribution) series is the average annual inflation rate after trimming the 15 per cent (by weight) of items with the highest and lowest year-ended inflation rates (rather than calculating trimmed mean inflation using the quarterly price changes of items and then cumulating these quarterly rates to an annual rate).
- For further discussion on a range of measures, see ‘Box D: Underlying Inflation’, May 2002 Statement, ‘Box D: Measures of Underlying Inflation’, August 2005 Statement, and Brischetto A and A Richards (2006), ‘The Performance of Trimmed Mean Measures of Underlying Inflation,’ RBA Research Discussion Paper No 2006-10.