High services inflation is a problem for the RBA

Similar to the US experience, core goods inflation has slumped, but services inflation remains high.
Kieran Davies

Coolabah Capital

With our earlier analysis suggesting that strong demand has contributed to high core PCE inflation, our more recent work replicating an ECB approach shows that a simple accounting of the drivers of broad domestic prices – including household services – reveals that strong unit labour costs explain most of the recent high inflation.

While useful, the downside to these analyses is that they rely on the national accounts, which are published with a long lag in Australia. 

Taking a much simpler approach, the following charts split core CPI inflation into goods and services, where the core CPI is a reasonable, albeit more volatile, approximation of trimmed mean inflation, which is the RBA’s preferred measure of inflation. 

Goods inflation captures prices that have been affected by global supply disruptions – such as the price of new homes, motor vehicles, household goods, and computers – while services are more reflective of domestic costs, particularly unit labour costs.

Like the US, goods inflation has peaked and slowed sharply at the start of this year, driven by the resolution of earlier supply-chain disruptions. 

However, services inflation remains high, again similar to the US experience, reflecting higher prices for both housing and non-housing services.

This suggest that the RBA is likely to see a goods-driven improvement in underlying inflation this year, but that high services inflation could prove more persistent.

If this proves correct, high services inflation would prove a significant problem for the RBA, delaying the return of overall inflation to the 2-3% target band, particularly when the RBA is forecasting a relatively slow increase in unemployment in response to past interest rate rises.  

The core CPI approximates the RBA's preferred measure of underlying inflation


  

High core inflation has reflected strength in both goods and services prices 
High core inflation has reflected strength in both goods and services prices 


Core goods inflation has slumped as supply disruptions are resolved ... 
Core goods inflation has slumped as supply disruptions are resolved ... 


... which is similar to the US experience  
... which is similar to the US experience  


However, core services inflation remains high ... 
However, core services inflation remains high ... 


... which is also similar to the US experience
... which is also similar to the US experience


High core services inflation reflects strength in both housing and non-housing services 
High core services inflation reflects strength in both housing and non-housing services 


........
Investment Disclaimer Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). Forward-Looking Disclaimer This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.

Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.

Comments

Sign In or Join Free to comment