Commentary

 1 Comment

A bumpy rates road ahead

Stephen Bartholomeusz

Published 6:21 AM, 29 Jul 2010 Last update 10:03 AM, 29 Jul 2010


Julia Gillard has just dodged at least one of the higher calibre bullets that could be fired during the election campaign, with virtually no prospect of a rise in official interest rates when the Reserve Bank meets next week.

A month later? Who knows, because there were, as Adam Carr says, a number of anomalies in today’s CPI numbers. Should it turn out that the 0.6 per cent rise in the index in the June quarter was an aberration, it will be too late to impact the election.

The flip side of weaker-than-expected inflation, however, is usually weaker-than-expected growth. Had there not been an increase in the tobacco excise, the increase in the CPI would have been halved, which would suggest that the economy is still struggling to generate any positive momentum.

That would fit with both the anecdotal evidence from retailers, and the sales numbers now flowing from them. Retailers say demand, particularly for discretionary items, has been both thin and patchy and it is evident from the continuous heavy discounting that they have had to sacrifice considerable gross margin to try to maintain volumes.

Some of that weakness in consumer spending relates to the pulling forward of demand last year as a result of the massive stimulus packages, some to the previous increases in interest rates and probably some to continuing anxiety about the still-fragile state of the rest of the world.

One only has to read the minutes of Reserve Bank meetings to see how uncertain the bank board is about the outlook from month to month, so it would be understandable if consumers were also hesitant.

Gillard's electoral fortunes haven’t been harmed by the fact that the dollar has remained relatively strong, lowering prices of imports, or by the increasingly fierce contests between Woolworths and its reinvigorated competitor, Coles and the similar discount department stores wars between Big W, Kmart, Target and the lower end of the Myer offer.

Coles has been improving its fresh offer while driving supermarket prices down to drive volume and share gains and Woolworths has been reluctantly (albeit not completely) forced to follow suit.

In department stores, there is a complex battle going on as Myer battles to maintain its sales in its first year of ASX listing while colliding with both David Jones and Target. Kmart’s radical new narrower range and price-driven offering is sending waves across the sector, buffeting Big W and its own sibling, Target, in the process. Other retailers and suppliers are also experiencing the flow-on effects of a difficult and ultra-competitive environment.

Adam Carr is right – there were falls in categories like electricity and transport that defy logic and may be aberrations or statistical glitches – but the combination of a strongish dollar, a weak domestic economy and intense retail competition is likely to persist for some time yet.




|  

1 Comment


Michael O'Brien wrote:

You are correct, Stephen. These figures are definitely dodgy and should be ignored by the RBA. In reality the RBA has to hike.

(See A bumpy rates road ahead, July 28)

Not to would demonstrate political bias and a continuation of upward movement or a flat result above 3 per cent CPI next month would make that very obvious. It pauses when the figures are clearly suspect during an election. Stevens' position would be untenable. There is plenty of media comment that the RBA has been under-clubbing. A pause on suspect figures would damage credibility.

28 Jul 2010 5:00 PM



Contribute to the Conversation

To contribute your comments for possible publication, please Login or Register.

Preference will be given to succinct contributions. We may contact you via email prior to publication.


Sponsored Links