Economics Watch: Oz CPI, US Fed Meeting Overshadow All Else

By Glenn Dyer | More Articles by Glenn Dyer

Another top tier economic release this week (and for early 2021) with the release Wednesday of the Consumer Price Index for the December quarter.

In normal, non-COVID times this was a big deal – now with the economy still on life support from the federal government and Reserve Bank which is committed to ignoring inflation for the next three years and leaving interest rates at their current record lows, inflation is not such a big deal.

Yes, the price movement will be noted by the RBA and it is not expected to have any impact on policy at all.

Economists expected a 0.7% quarter on quarter rise in the CPI (out Wednesday) which will leave annual inflation at a very weak 0.7% (if there are not revisions to past reports).

AMP Chief Economist, Dr Shane Oliver says the rise will reflect the normalisation of child care costs (after the subsidy was removed on July 12), higher alcohol taxes, a small rise in oil costs and a seasonal rise in travel costs.

The Australian Bureau of Statistics has estimated the impact of the child care change will add 0.3 of a percentage point to the CPI.

Underlying inflation is expected to remain weak at just 0.4% quarter on quarter or an annual rate of 1.1% and reflecting weak food prices, lower clothing prices, falling rents and ongoing spare capacity in the economy.

And there will be no sign of wage pressures which will be a negative for the RBA which has made it clear that’s the very thing it wants to see.

In other times that would be a bullish reading for Australia and even though the rise will be ’normal’ in that it will be large enough to ease fears if disinflation, much of the rise looks like being down to government decisions such as the rise in child care costs and tobacco and alcohol quarterly increases.

Strip those out and the 0.7% falls back to 0.3% or less which will be a better reading of the absence of cost pressures in the economy which will concern the RBA.

The CPI will come on top of solid jobs data for December and reasonable retail sales (even though there was a fall in December, November’s big rise saw retail sales rise more than 9% in 2020.

The AMP’s Dr Oliver says “Australian economic data remained strong over the last week with employment up another 50,000 in December, new home sales nearly doubling in December pointing to a strong rebound in housing construction and consumer sentiment and business conditions PMIs remaining strong despite the mini coronavirus scare over Christmas/New Year. The continuing rebound in employment is particularly impressive.”

Nearly 90% of jobs and hours worked that were lost into May have now been recovered making for a very Deep V rebound. This compares to only 56% of US payroll jobs that have been recovered. And both unemployment and underemployment have fallen sharply taking the labour underutilisation rate down to 15% from around 20% in April,“ Dr Oliver wrote at the weekend. 

The Australian Bureau of Statistics have changed some of the weightings in the CPI – the travel component has been cut to reflect the absence of spending on overseas travel, while a government subsidy in WA for power users will drop costs in Perth. The ABS says the fall will be “significant”.

Business conditions in the December NAB survey (Wednesday) are likely to have remained solid and the Reserve Bank’s credit growth data for December and 2020 on Friday is like to show more signs of a bottoming and a rise in housing finance.

……………….

A couple of 2021 firsts this week will give a better idea of just where the US economy is heading into the new year with a change of national leadership and the pandemic hammering confidence and consumer activity.

While the January business survey last week showed manufacturing at a 13 year and a half year high this month, retail sales, which remains the heart of consumption and economic growth, are weak.

The labour market remains soft as well and while more stimulus is coming from the new Biden Administration, it is needed merely to maintain demand at the current soft levels.

There are few if any price pressures, wages growth is confusing and not really showing much happening.

That’s the background for the first Fed meeting of 2021 with the new economic forecasts and post meeting statement from chair Jay Powell expected early Thursday morning, Sydney time.

There’s likely to be no change and the fed will maintain its expansive monetary policy stance with no change to its $US120 billion a month in bond buying.

A day later there’s the first estimate of US 4th quarter GDP.

Economists are forecast a rise of 4.7% for the quarter (on the annualised way the Americans measure growth). Quarter on Quarter will be around 1.1% to $1.3% (and depending on past revisions).

Growth at that rate will see growth for 2020 as a whole around a fall of 3.5%, which would be one of the largest annual contractions outside the Depression.

This year economists are forecast growth of around 5%, depending on the success of vaccinations.

That is still a big question mark with shortages of supplies, badly planned campaigns and confirmation that the former Trump administration stuffed up their much vaunted plan to have 20 million people vaccinated by the end of 2020 with ample supplies in reserve. Neither has happened.

There are shortages in Europe as well and the UK and both regions now look like they will slide back into recession this quarter and perhaps the next if the vaccination snafus are not sorted out.

A year on from the appearance of COVID in China, the pandemic has reappeared in that country with slowly growing lockdowns in more and more areas.

Japan has a rising problem with infections and data last week confirm the economy has slid back into deflation and contraction.

Unlike Australia when we saw reasonable consumer spending in the December quarter, America saw a contraction with retail sales down 0.1% in October, 1.1% in November and 0.7% in December.

“You’re really going to see a loss of momentum throughout the quarter,” said Kevin Cummins, chief U.S. economist at NatWest Markets.

“It’s a set up for a really weak Q1.” PMI data shows manufacturing activity has been strong, but labor market data is weak and consumer spending is disappointing,” he told CNBC.

“You’ve got to juxtapose what’s happening with the vaccine and the virus with what’s happening with underlying data. We’ve definitely seen a lot of the things that could spark a pullback,”according to Lori Calvasina, chief US equity strategist at RBC, according to Reuters.

 

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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