Australia | Jul 09 2007
By Greg Peel
In a refreshing bout of candour, the economists of UBS basically suggest their statistical measurements of inflation are about as useful or useless as any collection of numbers that never seem to come out the way once expects. Lies, damned lies and statistics, one might say. However, that hasn’t stopped them attempting to pre-empt the Australian second quarter consumer price index result.
The Q2 CPI is due on 25 July, two weeks ahead of the RBA’s August rate decision. There is no doubting this number will feature significantly in whatever the RBA will chose to do. It is not the only consideration, however. The employment data due out on Thursday will also provide some clues, as will other indicators of economic growth, and offshore developments.
The UBS inflation survey looks specifically at 30% of the items in the CPI measurement and makes seasonal estimates for the rest. The result for Q2 headline inflation is +1.1%, which compares favourably to the economists’ earlier forecast of 1.0%. After two results close to zero in Q4 and Q1, this would bring annualised inflation into a level of 2.0%. This is the bottom of the RBA’s target zone of 2-3%.
The bulk of the rise is made up of price increases in petrol and vegetables, which will be no surprise to anyone who’s been near a servo or supermarket lately. (I just paid $14.99/kg for some plain old green beans, for heaven’s sake. Bananas? That was nothing.). But the RBA is more keen to look at the “core” inflation rate, which removes the supposedly volatile elements of food and energy. UBS has this at 0.6%, for an annualised rate of 2.4%. Again, not too threatening.
(In thinking about this concept of removing volatile elements, it occurred to me to ponder the question: what if food prices don’t go down again? While droughts break and floods recede, it’s no stretch to consider that the scarcity of water in general in Australia will push fruit and vegetable prices up for some time, if the Murray-Darling crisis is anything to go by. In the meantime, the global demand for biofuels has pushed up the prices of grains, perhaps irrevocably, which in turn pushes up the price of meat. If the oil price makes a secular shift upward, the flow-on effect reaches everything from production to transport costs of a vast range of goods and services. In other words, oil inflation moves from headline to core. But if food prices make a secular shift, where is it felt? Outside of one’s regular trips to Tetsuya’s, or perhaps the Scottish Restaurant, it can only ever be felt in the trolley. How does food inflation ever make it to core? Yet food inflation is fundamental to one’s very existence.)
So far, based on the UBS estimates, there appears no reason for the RBA to hike rates. However, the story starts to break down when we look at the RBA’s “statistical measures”.
Basically, it’s no good just to separate “headline” and “core” inflation measures. General volatility is also felt across the seasonal patterns of four distinct quarters. Thus in order to arrive at a smooth, seasonally adjusted, trend-revealing measure of inflation, the RBA has to take the original figures and knead them, sit them in the fridge to prove for a while, and then get out the rolling pin and work them into something nice and consistent. Only then will it be apparent what the true state of inflation is, and only then can a legitimate monetary policy decision be made.
The good news is that Q2 is usually the least inflationary quarter of any given year. Annual price hikes across arrange of goods and services that can be reliably expected rarely occur in Q2. The bad news is that this means, from a statistical point of view, that the Q2 numbers have to be adjusted upwards. Hence we’re not out of the woods yet.
The last two quarters provided an average gain for RBA statistical measures of 0.5%. With inflation running at about 2.5%, this means the gains still don’t manage to breach the target zone. But were this quarter’s figure to come out at 0.7% there would be a clear breach. Economists suggest this number would trigger a rate rise. Some even suggest 0.6% is enough.
UBS crunched the numbers and came out with a figure of 0.8%. That’s it – we’re heading for a rate rise in August.(A view which was again repeated by economists at GSJB Were this morning).
Or maybe not, says UBS. Maybe the aggregated margins for error across the various statistical measurements render the estimates not very reliable. They haven’t been very reliable in the last two quarters, the economists admit. But then forewarned is forearmed, as they say.
And UBS does point out that the results for the second quarter 2007 are nearly identical to those of the second quarter 2006 – just before the RBA started its last tightening phase.
