Bulletin

17 January 2013

Seasonality & falling fruit & veg holding CPI back. Forecast Q4 CPI 0.2%qtr, core 0.8%qtr.
Westpac is forecasting a Q4 seasonal moderation
in headline inflation to 0.2%qtr from 1.4%qtr in Q3. Nevertheless, with the flat print for 2011Q4 dropping out the annual rate will lift from 2%yr to 2.3%yr.

Dec quarter 2012 CPI forecast

Q4 2012 forecast Item Food of which, fruit & vegetables Alcohol & tobacco of which, Tobacco Clothing & footwear Housing of which, Rents of which, House purchases of which, Utilities H/hold contents & services Health of which, Pharmaceuticals Transportation of which , car prices of which, auto fuel Communication Recreation of which, audio vis & comp of which, holiday travel Education Financial & insurance services CPI: All groups CPI: All groups % year Core inflation % qtr -1.2 -9.8 0.9 0.9 -0.6 0.6 1.0 0.6 0.3 0.2 -1.2 -5.0 0.9 -0.2 2.2 0.2 1.3 -2.0 4.3 0.0 0.7 0.24 2.25 %qtr Dec-12 CPI seasonally adjusted CPI ex housing Weighted median Trimmed mean Average RBA core Average RBA core* ex carbon 0.4 0.1 0.8 0.8 0.8 0.7 contrib -0.19 -0.29 0.06 0.02 -0.02 0.14 0.07 0.05 0.01 0.01 -0.07 -0.06 0.10 -0.01 0.08 0.01 0.16 -0.05 0.20 0.00 0.04 %qtr Sep-12 1.2 0.8 0.8 0.7 0.7 0.6 Q3 2012 actual % qtr 1.9 10.2 0.9 1.1 0.2 3.2 0.8 0.9 12.2 1.0 2.4 -2.6 -0.8 -1.0 -3.9 0.5 0.9 -1.5 2.4 0.1 0.2 1.39 2.00 %yr Dec-12 2.2 1.5 2.7 2.5 2.6 2.3 contrib 0.32 0.30 0.06 0.02 0.01 0.71 0.05 0.08 0.44 0.09 0.13 -0.03 -0.09 -0.03 -0.14 0.02 0.11 -0.04 0.11 0.00 0.01 %yr Sep-12 2.0 1.2 2.6 2.4 2.5 2.4

We estimate a modest tick up in core inflation with a

0.8%qtr (0.82% unrounded) rise in the average of the RBA measures. With a 0.76%qtr rolling out from 2011Q, the annual pace lifts a touch to 2.59%yr from 2.52%yr in Q3.

Westpac estimates that the Q3 introduction of a carbon

price added around 0.1ppts to the core measures of inflation. We think that it will boost the core measures by a similar amount in Q4. However, due to rounding, we estimate that without the carbon price, core inflation would be running at 2.3%yr in Q4 rather than 2.6%yr.

The impact of the carbon price on the core inflation is

important for the RBA. Our estimate indicates that 6 month annualised core inflation, ex carbon, was lifted from 2% in 2012H1 to 2.4% in 2012H2, an acceptable result for policy makers. However, if the carbon impact on core inflation was negligible, the underlying six month annualised pace would have lifted from 2% in 2012H1 to 3% in 2012H2, a more disturbing trend. There is no official estimate of the impact of the carbon price on the CPI.

The largest single contribution to the CPI comes from

housing rents, house purchase and utilities. Typically utilities are flat in Q4, while we expect a solid increase in rents. House purchase costs lifted sharply in Q3 (up 0.9% from -0.1% in Q2). Due to some uneven moves between states, we expect this lift to moderate in Q4 (up 0.6%), but nevertheless confirm an increase in housing price pressures in the second half of 2012.

The wholesale market price of fresh fruit & vegetables

fell significantly in Q4. The ABS seasonal factors suggest a rise is more normal, particularly for vegetables. Our forecast for a 9.8%qtr fall in fresh fruit & vegetables will be a 0.3ppt drag on the headline CPI.

Domestic holidays travel costs usually jump in Q4 ahead

of the summer holiday period. We expect a solid 4.3% increase to contribute 0.2ppts to headline inflation. Holiday travel is seasonally adjusted for the core but we believe it will be trimmed out of the measure.

Transportation costs are another source of inflationary

pressure, with the 2.2%qtr rise in fuel prices contributing 0.1ppts to the CPI.

Sources: ABS, RBA, Westpac Banking Corporation. *Westpacs estimte. The ABS is not providing an estimate of impact of the carbon tax.

Pharmaceuticals will have had the usual seasonal fall in

price as households cross the Pharmaceutical Benefits Scheme payment threshold and thus gain access to subsidised pharmaceuticals. The 5.0% fall in the quarter will be a 0.1ppt drag on the headline CPI and compares to a 5.5% fall in 20011Q4.

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

The Q4 CPI normally experiences a seasonal drag of 0.2ppts. Normally you would expect that seasonality would result in a softer print in the Q4 CPI compared to Q3. The ABS seasonal factors suggest that seasonality in Q4 is worth 0.2ppts compared to +0.2ppt in Q3. Key to this seasonality is falling pharmaceuticals (via wider access to the PBS), medical services, some garments, footwear & accessories and household equipment & furnishings. Housing still a key source of inflationary pressures. Housing, with a very large weight of 22.3%, is forecast to rise a robust 0.6%qtr, contributing 0.14ppts to the CPI. It is true that this is quite a step back from the 3.2%qtr rise in Q3, but that number was boosted by the introduction of the carbon price, with most of the impact on the CPI coming via utilities: electricity prices rose15.3%qtr. The Q4 forecast is, however, a modest step up from the average of 0.5%qtr in the three quarters to June 2012. New dwelling purchases, with a weight of 8.7%, are forecast to contribute 0.05ppts due to a 0.6%qtr rise forecast for Q4. This is a step back from the 0.9%qtr rise in Q3. There have been comments that the carbon price may have had a role to play here. but house prices rose 1.5%qtr in Sydney, 2.7% in Brisbane and just 0.1% in both Melbourne and Perth. Our forecast is still up on the 0.1%qtr print in Q2, and the 0.1%qtr print in Q1. While the price of new dwellings has clearly stabilised and started to rise, demand is not robust enough to support a significant trend acceleration in house price inflation. Rent inflation remains fairly robust (a weight of 6.7%) and our forecast for a 1.1%qtr rise follows on from a 0.8%qtr rise in Q3, and a 1.1%qtr rise in Q2. The seasonal price rise for utilities, and the impact of the carbon price on utilities prices, has now passed, so a very modest 0.3%qtr rise is in store here. Utilities have a weight of 3.6%. Fruit & vegetable prices fell when normally they should rise with the return of warmer weather. Wholesale fruit prices fell 3.6% in Q4 as the rise in prices through Nov was not enough to negate the 10% fall in Sept. However, fruit prices have been softer at the retail level for a number of quarters, and anecdotes suggest this continued in Q4, with discounting by the major retailers. We expect a slightly larger fall of almost 10% (a 0.16ppt contribution). Vegetables are trickier to estimate as the volatility at the wholesale level is about double that at the retail level. Nevertheless, it is highly likely that some of the 29% fall in wholesale vegetable prices was passed on to consumers. We are forecasting a chunky, and seasonally unusual, 10%qtr fall in vegetables (0.13ppts), offsetting some of the seasonally unusual 10.5%qtr rise in Q3. Other goods are a mix of seasonal positives & negatives. There are some modest inflationary pressures in other foods, restaurants & takeout food while alcohol & tobacco continues to make a positive contribution. However, we suspect there is downside risk to our forecast 0.6%qtr fall in clothing & footwear (0.02ppt contribution). Nominal clothing & footwear retail sales have fallen in each of the five months to Nov, suggesting there may have been significant price discounting over this period of time. The click frenzy sale, Australias attempt to mimic the US Black Friday sales, was in the middle of this quarter. We also expect to see the usual seasonal moderation in household furnishing & equipment inflation (to 0.2%qtr from 1.0%qtr in Q3 and 1.5%qtr in Q2). Prices are still falling for electrical goods and the
50 40 30 20 10 0 -10 -20
0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4

There is a seasonal drag on the CPI in Q4

%qtr
historical projected

%qtr
Sources: ABS, Westpac Economics

0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4

Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

Dwelling purchase costs lifting off their low

%yr
dwelling purchase cost (rhs)

%yr
rents (rhs) total housing costs (lhs)
Sources: ABS, Westpac Economics

8 6 4 2 0 Sep-02

8 6 4 2 0

Sep-04

Sep-06

Sep-08

Sep-10

Sep-12

Wholesale fruit prices eased back in Q4

60 50 40 30 20 10 0 -10 -20 -30 -40 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08
Sources: ABS, Westpac

%qtr
CPI fruit Market fruit prices

%qtr

60 50 40 30 20 10 0 -10 -20 -30

Dec-10

-40 Dec-12

Vegetable prices collapsed in Q4

%qtr
CPI vege (rhs) Market vege prices (lhs)

%qtr

25 20 15 10 5 0 -5 -10

Sources: ABS, Westpac

-30 Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

-15 Dec-12

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

seasonal discounting for carpets, small electrical appliances and glassware will provide some offset to seasonal price rises for tools, household textiles and furniture. Education flat, pharmaceuticals a large seasonal drag. We expect education to be seasonally flat as the price adjustments in this sector occur in Q1. Pharmaceuticals are set to have their usual seasonal fall (4.3%qtr, 0.05ppts). Pharmaceutical prices tend to fall in Q2, and then again in Q3 and Q4, as more families total spending on health breaches the threshold for government assistance and making them entitled for the Pharmaceutical Benefits Scheme. There are also seasonal price falls for medical services in Q4. All up health costs are forecast to fall 1.2%qtr, contributing 0.07ppts to the CPI. Transport price inflation driven mostly by fuel. Fuel prices are forecast to rise 2.2%qtr as the fall in prices through November was not enough to offset the large rise in prices through Aug, Sept and Oct. Rising airfares lift recreation & culture costs in Q4. The deflation in audio visual & computing equipment continues, but this will not fully offset the larger than normal rise in holiday travel & accommodation. It does appear that there was a larger than usual seasonal spike in airfares this year. All up, recreation & culture is forecast to rise 1.3%qtr, contributing 0.16ppts. Pick up in finance costs. Insurance & financial services (+0.7%qtr) are set to pick up again after a soft Q3 (+0.2%qtr). Annual pace of core inflation lifts to top half of the band. We do see an acceleration in the pace of core inflation, to 0.8%qtr from 0.7%qt in Q3 and 0.6%qtr in Q2. This lifts the annual rate from 2.5% to 2.6%. Despite seasonal adjustment, our forecast rise in domestic holiday travel is still large enough to be trimmed out of the core measures, just as our forecast fall in pharmaceuticals is trimmed out (even after seasonal adjustment). We estimate that 0.3ppt of our forecast for Q4 core annual inflation is due to the introduction of the carbon price; without it, core inflation would be running closer to 2.3%yr. The lift in core inflation due to the carbon price is likely to have mostly run its course by Q4. Justin Smirk, Senior Economist, ph (612) 8254 9336

The shadow of the Q3 rise in petrol hits in Q4

170 160 150 140 130 120 110
Sources: ABS, Melbourne Institute, Westpac Economics

AU/l
CPI motor vehicle fuel API unleaded petrol WBC

AU/l

170 160 150 140 130 120 110 100

100 Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Contributions to 0.2% qtr Q4 CPI forecast

Recreation Housing Transport Food ex fruit & veg Alcohol & tobacco Financial services Houshold contents Education Clothing Health Fruit & veg -0.29 -0.02 -0.07 0.04 0.01 0.00 0.16 0.14 0.10 0.09 0.06

Sources: ABS, Westpac Economics

-0.4

-0.2 0.0 0.2 ppt contrib. to the quarter

Carbon price boosts the headline CPI

8 7 6 5 4 3 2 1 0
Sources: ABS, RBA, Westpac Economics

%yr
avg RBA core CPI* %qtr (rhs) headline CPI %yr (lhs) avg RBA core CPI* %yr (lhs)

%qtr
* average of s.a. trimmed mean & weighted median CPI ex tax changes & Carbon Price forecasts Mechanism
CPM

3.1 2.6 2.1 1.6 1.1 0.6 0.1 -0.4

-1 Sep-95

Sep-99

Sep-03

Sep-07

Sep-11

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