More clout for housing costs (CPI versus RPI)

Chris Zappone

September 23, 2011

The role of housing costs in inflation has been cemented in the latest Bureau of Statistics consumer price index assessment. Photo: Erin Jonasson

HOUSING costs will figure larger in official inflation figures to come, after a reweighting of the consumer price index by the Australian Bureau of Statistics.

The bureau yesterday released its latest weighting of average expenditures of households, with the share of housing rising 2.7 percentage points to 22.3 per cent from a 19.53 weighting in the June-quarter 2005 weightings.

''This simply implies that should the cost of compatible new houses fall, then this is more deflationary for headline CPI given the bigger weight,'' said Annette Beacher of TD Securities.

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Ms Beacher cautioned that CPI excludes existing house prices.

Interest rate uncertainty, along with worries about the health of the local and global economy, have cooled activity in the market.

In the ABS reweighting, new homes bought by owner-occupiers rose to a 8.67 per cent share of the basket of goods from 7.87 per cent in the last weighting using June-quarter 2005 prices. The change was due to ''both a price and volume increase'' in new home costs.

''The volume increase was driven by additional new residential construction driven by population growth in the capital cities and an increase in the average size and quality of new dwellings,'' the ABS said.

Rents will also figure larger in the CPI basket of goods, with their weights increasing to 6.71 per cent from 5.22 per cent in the last weighting in 2005.

While falls in the housing market could have a deflationary effect on CPI, said Moody's Economy.com analyst Katrina Ell, ''there could be a moderate upward bias given the greater weighting given to housing which is seeing rent and utility increases''. The share of utilities in the CPI weightings rose from 3.1 per cent in 2005 to 3.61 in the updated figures.

Insurance and financial services as a share of CPI dropped to 5.1 per cent, from 9.31 in June-quarter 2005 prices, as the ABS removed indirect charges related to deposits and loans.

The reweighting comes after the ABS revised the seasonally adjusted methodology on CPI last week, lowering its reading of core inflation to 0.6 per cent in the second quarter from the 0.9 per cent reported in July. The headline inflation figure was a reported 3.6 per cent in the June quarter.

Read more: http://www.smh.com.au/business/more-clout-for-housing-costs-20110922-1kn7k.html#ixzz1Yj3jffsB

The return of inflation?

The return of inflation?
Posted By: Edmund Conway at Mar 24, 2009 at 11:18:26 [General]

So, after all that, we're not in deflation. To general shock and amazement throughout the City, the Retail Price Index did not creep into negative territory last month, dropping instead from 0.1pc to zero.

Consumer Prince Index inflation, the measure targeted by the Bank of England, actually rose from 3pc to 3.2pc, meaning the Governor Mervyn King has had to write another letter of explanation to the Chancellor.

All of this is a bit of a nightmare for the Bank. Having already cut interest rates to near zero and embarked on quantitative easing - the most radical means of monetary policy available to a central bank - its main alibi had been that the UK was facing the serious threat of deflation. To have then to find yourself trying to explain why inflation is still above its 2pc target is not just embarrassing but undermining. After all, part of its job is to influence peoples' decisions on financial and economic matters, and having spent months warning about the risk of falling prices, now the figures seem to have proven them wrong, in the meantime at least.

Most economists believe (and I am inclined to agree) that this month's figures were a blip, and that deflation will inevitably follow in the coming months. After all, RPI may not be in negative territory yet, but at zero it is still at the lowest level since 1960. Likewise, almost all the other evidence in the economy - everything from pay cuts to falls in commodity prices - points towards falling rather than rising prices.


Indeed, in his letter to the Chancellor, which you can find here, alongside Alistair Darling's response, King himself says: "notwithstanding the inflation outturn for February, it is likely that over the next year CPI inflation will move below target, although the profile of inflation could be volatile, reflecting the reversal of the temporary change in VAT on CPI inflation."

But this increase in CPI is already prompting a few people to reconsider their positions on inflation (after all the consensus forecast was for fall to a 2.6pc). The fact is that not only did some of the volatile items' prices increase (things like petrol and food) but so did core inflation - which strips out these unpredictable items and is regarded as a more steady, reliable indication of what prices are doing. This is probably due to the weakness of the pound in recent months - sterling has depreciated by more than a quarter over the past 18 months, and this was bound at some point to feed through to higher domestic prices.

But what if - and it is a big if - the massive amount of medicine already ladelled into the UK economic system - the cut in rates from 5pc to 0.5pc, the extra cash pumped in by the Government, the fall in the pound and the Bank's decision to start creating money and buying up bonds - is starting to work already, counteracting the recession and boosting prices. What if that deflation threat so frequently mooted by the Bank and others, was far less severe than was ever the case? In that case it would have profound implications for monetary policy, meaning the Bank may have to reconsider its decision to spend up to £150bn on quantitative easing and exit this strategy even before it has properly got it underway.

There is a hint of this doubt in King's letter, which says: "At its next policy meeting the MPC will want to consider further the extent to which the balance of risks has changed in light of the latest inflation figure and all the other relevant data. In particular, in the context of the CPI data this month, the Committee will need to judge to what extent the main upside risk to the inflation outlook identified in the February Inflation Report - that there is greater pass-through of the exchange rate depreciation to inflation - is crystallising, or whether the inflation outturn reflects other factors."

I doubt, however, that this will change the Bank's fundamental position - that the UK is heading into a nasty recession (something that almost always goes hand in hand with falling prices), that the risk of debt deflation, the phenomenon which affected the US in the Great Depression, remains bigger than the risk of inflation being thrown up as a result of its remedies, and that it must keep rates low for some time.

King is currently appearing at the Treasury Select Committee, from which we'll have more later. As I post this, he's just blamed the fall in sterling for the increase in inflation - saying that this was "one of the upside risks" laid out in the Inflation Report last month.


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