Australia's Consumer Price Index: 3 things to watch

Summary

• ABS has revealed that the recent free childcare scheme had a significant effect on CPI over the June quarter.
• Free childcare could subtract 1.1% from headline CPI as childcare was made free by the government.
• Analysts expect CPI to fall 2% in June quarter amid free childcare policy and plunging petrol prices.
• Unemployment, house prices and petrol prices would be the 3 things to keep an eye on.

Inflation in Australia has reported its major fall in the second quarter, as the government made childcare free to support families amid COVID-19 lockdown and plummeting petrol prices. However, most of the same could reverse in 2020.

Market experts have predicted that CPI could fall 2% quarter-on-quarter, which would be the largest since ABS began recording CPI data in 1948. It would be a big disappointment for Reserve Bank of Australia (RBA) that had spent years struggling to bring inflation back into its target range of 2-3% and has been improving with a 2.2% reading in Q1.

As per Australia's chief statistician, Australian CPI would drop significantly in June quarter as the government made childcare free, which is a part of the stimulus package for coronavirus. Rental support packages and transitory or permanent renegotiation of rent between landlords and tenants would be considered as a drop in prices, according to ABS.

CPI measures the average change in the price of basket household goods and services over a period of time. The index is usually used to calculate a country's overall cost of living and to evaluate growth, deflation, or stagflation. RBA has been trying to keep a steady inflation rate between 2-3% since the early 1990s.

Childcare costs

The government made childcare free from 6 April to 28 June, and the scheme was shortly stretched to 12 July. ABS data stated that free childcare would subtract 1.1 percentage point from the headline CPI.

Childcare adds about 1.2% of the household expenditure in CPI, calculated through changes in out-of-pocket expenses for families. The full drop of the childcare service's price is unparalleled, though the weightage of childcare is relatively small. However, it was not the weight of the service, but the severe price fall that affected CPI. There was 0 spending by households on childcare for 62 out of 65 business days in the June quarter.

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Nevertheless, the September quarter is expected to be the opposite of June as the scheme has now ended. Childcare prices would rise from where they left off and are anticipated to rise yet again across September quarter.

Here are 3 things to watch:

1. House prices under pressure

RBA Governor Philip Lowe stated in the July meeting minutes, released on 21 July that the decline in the flow of new arrivals to Australia was impacting some real estate markets, primarily, the rental market.

He stated that the supply of rental housing had risen in some areas and vacancy rates had increased sharply in Sydney and Melbourne to just above 4%. Mr Lowe asserted that soft conditions in the rental market are expected to prevail for some time on the rental inflation.

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The Governor also stated that housing prices stayed unchanged in several smaller cities, but declined in some larger cities in June, however, they were a little below the peak in the case of Sydney and Melbourne. He also added that housing turnover had increased slightly following a significant decline when in-person auctions and open homes were prohibited due to social distancing restrictions.

RBA members have predicted a weak economic scenario and soft outlook for the housing market.

2. The rise in unemployment rate

Latest unemployment numbers by ABS revealed that the unemployment rate has risen to 7.4% in June (the highest monthly unemployment rate since November 1998), up by 0.3% compared to the earlier month.

Further, Treasury revealed that without JobKeeper wage subsidies, the effective unemployment rate would have surged to nearly 11%. While there have been significant increases in part-time employment, full-time employment numbers fell by 38,100 in June.

Treasury has announced that the national jobless rate will rise to 9.25% by December end of 2020 as COVID-19 worsened in the country, with the second outbreak in Victoria. Victoria's lockdown is expected to wipe off $3.3 billion from the Australian economy in next 2 months.

Maxime Darmet, Director in Fitch Ratings Economics Team, stated that the supply-side economics capacity would be significantly impaired by the coronavirus shock as long-term unemployment rises, and working hours decreased, while investment and capital accumulation slows down.

3. Tumbling petrol prices

As per Australian Institute of Petroleum, the national average price of unleaded petrol increased by 4 cents to a 17-week high of 125.7 cents a litre last week. But prices in Sydney and Melbourne are easing.

Petrol prices have fallen by 19% in the June quarter, and could shave off 0.7 percentage points off headline consumer prices when inflation data is issued on 29 July.

Australia to enter deflation

While high inflation can suffocate the economy, a stable increase in inflation is an indicator of economic growth. However, lower prices overall (a short period of low inflation or deflation) could give a boost to consumer confidence to keep the economy stable in financially challenging times.

Deflation in a country is an indicator of contraction of the economy, which can have ravaging long-term effects. There are increasing expectations that ending of childcare scheme could help in reversing the quarterly drop in CPI next quarter.

Tapas Nickland, Economist at NAB, stated that inflation is expected to be subdued due to high unemployment, bleak housing rents and new dwelling costs that make up 15% of the CPI basket along with disinflationary momentum from factories in China.

The rising COVID-19 cases in Victoria and subsequent lockdown measures have resulted in considerable uncertainty on how inflation in future would be affected by the government measures and prevailing economic ambiguity in the country.