Australia | Oct 11 2007
By Rudi Filapek-Vandyck
Westpac and the Melbourne Institute report Australian inflation expectations have surged to a two-year high in October, while the trend in labour market opinions remains consistent with a strong jobs growth outlook.
Consumers’ inflationary expectations spiked to 4.6% in October from 3.1% previously, the economists report, adding this makes for the highest median since October 2005. The economists acknowledge the monthly series has been highly volatile of late, but looking through this volatility, they believe the October spike has eliminated last month’s apparent downtrend since June. The trend is now rising from 3.42% in January to 3.82% in October.
Of greater concern, the economists believe, is that the median expectation of managers and professionals (a group likely more exposed to price setting decisions) has jumped to 5.2% in October from 3.1% previously. This is a record high for this series (data began 1995). This has created a strong uptrend from a low of 3.52% in February to 4.05% in October.
The economists believe the distribution of consumers’ inflationary expectations shows that the spike this month has been driven by sharp increases in the proportion of respondents expecting ‘extreme’ inflation over the next twelve months. The proportion expecting inflation of 10% jumped to 16.8% from 11.2%, and the proportion expecting inflation of “10%-plus” jumped to 15.8% from 8.7%. The proportion expecting inflation within the RBA’s 2% to 3% target band fell to 14.3% from 18.7%, well below its twelve month average of 17.8%, and the proportion expecting inflation above the band rose to 63.7% from 54.7%, above its 12mth average of 58.6%.
Westpac adds that while inflationary expectations have been highly volatile of late, their renewed strengthening uptrend is clear, and reinforces the bank’s view of rising risks for actual inflation.
The bank’s preliminary forecast is for another ‘high’ CPI in Q3 of 1.1%qtr headline and 0.9%qtr RBA core, and expectations point to risks of this high pulse continuing into Q4. (Economists elsewhere are currently forecasting Q3 core CPI growth of 0.7-0.8%).
Consumer unemployment expectations fell 4.1% in October, their first fall since May. Their trend has been essentially flat since June, but their deviation from long run levels remains highly negative, and therefore consistent with strong labour market opinions, and continues to point to a strong outlook for full-time jobs growth into 2008.
