The June quarter inflation figures released yesterday brought a sigh of relief from those worried the Reserve Bank might be about to raise rates next week. But the data on retail spending showed that, regardless of what inflation is doing, Australians are doing it tough.
The inflation figures get all the headlines but, for me, the retail trade figures are just as important.
When we think about inflation there is really only one thing to ask: what’s driving it?
If it is driven by excess demand – nice pay rises, lots of disposable income and so a spike in shopping and spending – then interest rate rises will be good for tempering it.
If instead it is driven by other factors – supply side issues, world prices and government excises (or indeed companies raising prices to increase or protect their profits) – then interest rate rises will have a negligible impact and only hurt the economy by forcing households to cut back on spending.
The key is not just looking at the inflation figures but the actions of households.
For that we can look at the retail trade figures.
And the answer is decidedly not one of excess spending:
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In the past year, the volume of retail trade (ie the amount of things we bought, rather than the amount we spent) fell 0.6%. That’s bad enough, but when you take into account population growth, on a per capita basis we each bought just under 3% less in April, May and June than we did in those three months last year.
That is not a sign of excess demand. And when you consider that one of the biggest falls in spending was dining out, that truly suggests people are watching what they spend and cutting back on non-essentials.
This bring us to inflation, which grew 3.8% in the past year. That is faster than the 3.6% growth in prices in the March data. Does this increase mean there is actually too much demand in the economy?
Well no.
Unfortunately, inflation does not go up or down in a nice consistent manner every month or quarter. But if you look at the past two years, inflation pretty much came down at the same pace as it went up:
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We are now six quarters since the peak level of inflation, and the current rate of 3.8% is essentially the same as the 3.9% rate we had in June 2022, six quarters before the peak.
While it would be better to see inflation fall, we are seeing fewer big price increases.
A year ago the price of more than half of the 87 items listed in the CPI basket of goods and services was rising by more than 5%; now it is less than a third:
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But what is driving the 3.8%, and what is keeping things “sticky”?
Of the top 12 biggest contributors to annual inflation, overwhelmingly the drivers are goods and services that people either consider essential (or “non-discretionary”), such as rents, building a new home, petrol and insurance, or things that have prices driven by non-market factors like tobacco and beer excise, and the cost of university and education.
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Yes the prices of dining out in restaurants or getting takeaway rose, but given the fall in spending on dining out in this week’s retail trade figures, clearly the price rise is not due to overwhelming numbers of people trying to book tables.
The prices of all discretionary items (excluding tobacco) rose just 2.8% in the past year, while the cost of essential items rose 4.5%.
Chief among these items were rents, which continue to be a massive issue around the country – but especially in Perth, Brisbane and Sydney:
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Another reason Australia’s inflation rose was big price rises in Perth and Adelaide.
Perth inflation jumped 2.1% in just three months.
But that was not due to an outbreak of spending and big wage rises in the west. Rather it was mostly due to the unwinding of the electricity rebates, and the cost of building a new home. Those two items alone accounted for half of the overall jump in prices in Perth in the June quarter.
When you put the retail figures with the inflation numbers, it’s clear there is no excess demand in the economy that needs to be stomped on by more rate rises.
Rather households are struggling to make ends meet, cutting back on non-essential spending and buying less because the cost of necessities such as rent, insurance and education is rising so fast.
And for those worried that Australia’s inflation is higher than other nations, remember as well that our inflation peaked later, and the path to below 3% remains largely in sync with the US and Canada at the same stage:
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Nothing in this data suggests the RBA should raise rates next week. The economy remains fragile, as households continue to cut back on spending in such a manner that suggests, as I noted two weeks ago, businesses will be starting to hire fewer people and even cutting back staff and hours.
And that is not an economy that needs to be slowed by further rates rises.