Have things finally turned for Treasurer Josh Frydenberg? Is the latest CPI a spike in a downtrend or first signs the Australian economy is bottoming?

The latest CPI (Consumer Price Index number) is just out. This is just one measure of prices but it has high visibility. Here is how the annualised numbers unfurl:

Annual CPI

Dec 18 2.08%
Mar 19 1.78%
Jun 19 1.33%
31 Jul 1.59%

Frydenberg will be happy that the number has kicked up and may have started to bottom out. He has seen GDP, interest rates and the currency all move against him since he took office. He’s been waiting for something to stop the slide. This might be it.

But a rise in the CPI can be ambiguous. It can mean that sellers are pushing price rises onto consumers or that buyers are bidding up prices because they are eager to buy.

Because the CPI is telling us about the price where supply meets demand, we can look a little deeper. First, we have NAB reporting earlier this month on the supply side:

These bank surveys are designed to tell us about the peoples’ economic mood; what Keynes described as the “animal spirits”. It’s what underpins prices; and prices make the CPI.

Business Confidence, Quarterly

Derived from NAB

Dec 18 4.1
Mar 19 2.7
Jun 19 4
9 Jul 3.1

The CPI and the RBA

The government swapped treasurers (Scott Morrison to Josh Frydenberg) last August, nearly a year ago.  Since then, the annual CPI numbers since then have been 1.89%, 1.78%, and 1.33%. Now we have: 1.59%.  The annual number improved because the latest quarterly number of 0.613% replaced last June’s 0.335%.

The Reserve Bank’s target is: 2-3% on average, over time. The RBA’s Governor Phillip Lowe said on July 25 that the board would not be dropping its target at the moment as “shifting the goalposts could entrench a low-inflation mindset”. It wants inflation up. Some economists call it meaningful inflation. The RBA explains how its board responds to the hand it’s been dealt:

 “If inflation is likely to remain too low, the Board would typically lower the cash rate.”  That is what it has been doing. For two months in a row now.

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What’s the RBA worried about?  The RBA explains this too:

“The Reserve Bank has an inflation target to achieve the goals of price stability, full employment, and prosperity and welfare of the Australian people.”

Significantly, the recent decline in the CPI is tracking the decline in annualised growth (GDP) since Scott Morrison handed over the treasury: 2.80%, 2.32%, 1.74%.  The next quarterly GDP number is not due until September 9. Josh Frydenberg says it’s growth that delivers jobs.

Now that both GDP (national supply and demand) and the CPI (prices) are drifting a little lower, things are not-quite-right. 

Business confidence

Looking first at what’s happening on the supply side.  This focuses on business – the suppliers of goods and services.  NAB’s numbers from July 9 say that business is a bit gloomy, a month after a Liberal election win.  Business, they say, has “lost significant momentum” and the decline is now “broad-based across industries”.

Business Conditions, Quarterly

Derived from NAB

Dec 18 12
Mar 19 4.7
Jun 19 2.4
9 Jul 2.4

And this is the case, even though suppliers of some goods and services could look forward to a cash injection from their employees’ reduced penalty rates; most recently on July 1, with more to come.

Yet business owners know that reducing wages does not bring an additional customer in the door. Reducing cleaners’ wages does not mean more hotel rooms to clean on a Sunday.

There may be a sound supply-side argument that the legislated 2022 tax cuts (for those earning between $90,000 and $200,000) encourages investment now by small business owners with an eye to their future cash flows. 

But the Liberal Party’s family-business base knows it’s all about customers today and NAB’s numbers say they’re pessimistic about customer demand for what they’re selling. NAB releases its next numbers next week.

Consumer sentiment

On July 25, the Reserve Bank Governor agreed that the problem is on the demand side:

“It remains to be seen if future growth in demand will be sufficient to put pressure on the economy’s supply capacity and lift inflation in a reasonable timeframe.”

So, what’s happening on the demand side?  This is where Josh Frydenberg has chosen to tickle the economy.  First, by the $1080 tax offset (for those earning between $48,000 and $90,000, with phase-in and phase-out for those close to either side of the maximum benefit).  Second, with friendlier “deeming rates” giving a little more cash to part pensioners (those with savings, not the poor ones). 

Consumer Sentiment, Quarterly

Derived from Westpac

Dec 18 103.9
Mar 19 100.3
Jun 19 100.9
10 Jul 98.4

Even so, the Westpac-Melbourne Institute “Consumer Sentiment” number was not good on July 10. The number was at a two-year low, says Westpac. The $1080 was then known (and $530 had been legislated more than a year ago), the RBA had just dropped interest rates, but the news on deeming rates had not yet hit the press.

The July sentiment number was under 100 which Westpac treats as “pessimistic territory”, and “troubling”. Westpac releases its next numbers next week.

What we’re watching

We’re watching for the next GDP growth number, to see if it too has slowed its decline.

With the US Federal Reserve cutting its target rate a few hours after the CPI came out, we will also be watching the moves in 2 and 10 year Australian Government bond yields.

On equities: it still gets down to the bond-pricing theory of share value versus the future earnings theory of value. The bond theory – that investors flock to equities as the bond yield falls – has been driving the ASX since January. With bond yields still ominously low and falling, expectations of future company earnings come into question and this can have an adverse impact on share prices.



RBA website.

ABS 6401.0 – Consumer Price Index, Australia, Jun 2019, released 31 July 2019

RBA Governor address to the Anika Foundation lunch 25 July 2019

The Westpac-Melbourne Institute Index of Consumer Sentiment website

NAB Monthly Business Survey website


We have derived the percentage CPI from Tables 1 and 2 ABS 6401.0

We mention Westpac’s and NAB’s monthly opinion surveys because their reports are widely anticipated.  We have smoothed Westpac’s and NAB’s monthly numbers (from October 18 to this month) making them quarterly and weighting the most recent month more than the earlier two.  Westpac’s consumer sentiment index ranged between 104.4 and 96.5 in that time. NAB’s business confidence index ranged between 7 and 0 and its business conditions ranged from 14 to 1. 

Westpac say their data is compiled from a survey of about 1,200 consumers which asks respondents to rate the relative level of past and future economic conditions.  NAB says that their fieldwork for their surveys is conducted over a couple of weeks, covering over 400 firms across the non-farm business sectors. 

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