As apartment living continues to evolve across Sydney's growth corridors, the quality and distribution of shared spaces is increasingly shaping how residents experience home. Rather than functioning as add-ons, amenities are being embedded into the daily rhythm of a building, supporting everything from quiet retreat to social interaction, often within a single vertical community.

At <a href="https://www.apartments.com.au/new-apartments/aeris-melrose-park-nursery-street-melrose-park-nsw-2114">Aeris</a> in Melrose Park, this approach is resolved through a layered amenity offering that unfolds from ground level through to its upper podium. Developed by <a href="https://www.apartments.com.au/developers/sekisui-house-australia">Sekisui House Australia</a> in partnership with Hankyu Hanshin Properties, the project introduces 468 apartments across two towers and a mid-rise building, positioned at the highest point of the broader masterplan.

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The amenity experience begins at street level, where two courtyards sit within a landscaped setting that connects residents to the wider network of parks and green spaces. These green spaces are not isolated pockets but part of a wider pedestrian network that links Aeris to the surrounding <a href="https://www.apartments.com.au/developments/melrose-park-nsw-2114">Melrose Park</a> precinct, including Central Park, future schools, and the Town Centre opening in July 2026. The result is a transition that moves from public to private without abrupt boundaries, allowing residents to pass through shaded, tree-lined environments before reaching the building itself.

Moving upward, the focus shifts to the level five podium, where the primary communal facilities are concentrated. This space brings together a 16-metre swimming pool, outdoor seating areas, and a communal BBQ zone arranged to take advantage of elevated outlooks. Seating is positioned beneath pergolas, creating pockets of shade that extend the usability of the space throughout the day. The pool edge aligns with views toward the wider district, reinforcing the sense of elevation that defines the project’s positioning.

In the adjacent building, this is complemented by quieter, more contemplative spaces, including an outdoor cinema set within the same level. Positioned to operate primarily in the evening, it introduces a different tempo to the shared environment, shifting from daytime activity to after-hours use without requiring separate zones.

[smartcode_project:default project_id=426 project_image_fid=360299]

The podium also accommodates an intimate private resident gym. Located on the lower levels, it gives residents convenient access to fitness facilities without leaving the building.

Above, the elevated podium sky deck extends the amenity offering, providing additional open-air spaces with elevated outlooks across the surrounding landscape. While more restrained in program, this upper level reinforces the project’s vertical progression, from ground-level greenery to elevated outlook, allowing residents to move between distinct spatial conditions within a single address.

This distribution of amenities reflects a deliberate response to how residents use space across the day. Sekisui House Australia Sales and Marketing Director Peter Kalaf points to the role these shared areas play in shaping buyer demand. Aeris has been conceived as more than a collection of apartments, with the podium pool, gym and outdoor cinema forming part of a broader lifestyle offering that extends the home beyond each individual residence.

[smartcode_project:default project_id=426 project_image_fid=360300]

What distinguishes Aeris is not the inclusion of these elements individually, but how they are arranged in relation to one another. Active, social, and passive spaces are layered vertically rather than separated, allowing residents to choose between them without leaving the building or moving far from their apartment. This proximity supports both routine use, such as a morning swim or evening workout, and more occasional gatherings, whether around the BBQ area or within the cinema setting.

The amenity design also sits within a broader framework of connectivity across Melrose Park. The Melrose Park Town Centre, anchored by Coles and Dan Murphys, features a mix of retail, dining, health and lifestyle offerings, bringing everyday convenience closer to residents. By the end of the year, more than five hectares of parks and open space, equivalent to around seven football fields of green space on residents' doorstep, will further enhance the precinct, allowing the internal facilities at Aeris to operate as an extension of the wider neighbourhood rather than a substitute for it.

Construction at Aeris continues to gather momentum, with ground floor slabs expected to be completed in late 2026 before the first sections of the buildings begin to rise above ground.

[smartcode_project_cta:default project_id=426]

Joel Robinson

Elevated amenity anchors daily life at Aeris, Melrose Park

Repeat buyers are one of the strongest measures of confidence in any apartment development.

At <a href="https://www.apartments.com.au/new-apartments/era-newcastle-west-124-126-bull-street-newcastle-west-nsw-2302">ERA</a> in Newcastle West, some purchasers are returning to <a href="https://www.apartments.com.au/developers/gwh">GWH</a> after living at the developer's One Apartments. Their decision to purchase again was driven by the quality of life they found after moving into their first GWH home.

Keith Wilton had spent years living in a house in East Maitland before deciding it was time for a change. Apartment living had always been on his radar, but he was selective about what he wanted.

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"I had some boxes I wanted to tick," he says.

Keith points to the open-plan design, generous outdoor areas and considered inclusions as key reasons One Apartments worked for him.

“One of those things was a nice indoor open plan area, but also I wanted a nice outdoor open area that I could entertain on in summer or Christmases or birthdays,” he says.

He also found value in the smaller details, from integrated appliances to shared resident spaces including the pool, cinema and rooftop areas.

[smartcode_project:default project_id=135096 project_image_fid=356818]

After comparing several developments, he chose One Apartments because of GWH's longstanding local reputation and his own experience working with the developer on a commercial project more than a decade earlier.

"I knew that they were local, that the quality of the build was going to be up there. I'd looked at other apartment complexes around and close by, and I just knew that here was a better decision location wise."

Today, Keith says the move has completely changed how he experiences Newcastle.

"I enjoy living in this location because it's more of a lifestyle change. That Newcastle city living where you can walk to restaurants and bars and even beaches and parks and even shopping across the road."

[smartcode_project:default project_id=135096 project_image_fid=356828]

Beyond the location, he says it's the sense of community that has surprised him most.

"Everyone loves living here because they chose to live here, but everyone looks out for each other. It's a real great community feel here."

For Aimee and Lyle Goodman, the journey started almost by chance.

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The couple happened to be having coffee in Newcastle when they noticed the site where One Apartments was about to begin construction.

"We were aware GWH was planning a development," Aimee says. "We made one phone call and things moved pretty quickly after that."

As busy business owners, they initially thought apartment living would simply reduce the maintenance that came with larger homes. Instead, it fundamentally changed how they spent time together.

"We actually catch up more as a family now," Aimee says.

"We've had homes with big yards and lots of space, but everyone ended up in different rooms. Here we'll have dinner together, the kids can play, and we spend far more quality time together."

[smartcode_project:default project_id=135096 project_image_fid=356829]

Lyle says their confidence came from GWH's reputation within Newcastle's building industry.

"I know people who've worked across different apartment projects, and whenever GWH came up the feedback was always the same. They're rock solid. They're quality."

That confidence only grew throughout the buying process.

"One of the things that really impressed us with GWH was the whole process, was the communication," Lyle says. "It was consistent, it was regular, there was no problem if we had some weird questions, there was no problems in getting answers."

[smartcode_project:default project_id=135096 project_image_fid=351104]

Aimee says one moment stood out.

"The project actually finished on time. We realised we needed to hurry up and sell our house because everything was happening exactly when they said it would."

The positive experience at One Apartments ultimately gave all three buyers the confidence to purchase again with GWH, this time at ERA.

Their confidence reflects what many buyers are seeking in today's apartment market. Location remains important, but so too does certainty around delivery, quality and long-term liveability.

[smartcode_project:default project_id=135096 project_image_fid=356822]

ERA builds on those foundations with 280 one, two and three-bedroom apartments across two landmark towers in <a href="https://www.apartments.com.au/developments/newcastle-west-nsw-2302">Newcastle West</a>.&nbsp;

Designed by <a href="https://www.apartments.com.au/architects/fk-australia">Fender Katsalidis</a>, the project will include more than 2,000 square metres of resident amenities, including a resort-style pool, gym, sauna, private cinema and rooftop entertaining spaces overlooking the harbour and coastline.&nbsp;

The development is also within walking distance of the Newcastle Interchange, Honeysuckle, Darby Street, the harbour foreshore, restaurants, retail and the city’s beaches, continuing the walkable lifestyle that existing GWH buyers say has transformed how they live.

[smartcode_project:default project_id=135096 project_image_fid=356826]

For Keith, the appeal remains straightforward.

"You feel at home even before you've moved into your home."

For Aimee, the change is measured in time.

“I just felt like I had more time,” she says.

[smartcode_project:default project_id=135096 project_image_fid=351102]

Construction at ERA is now underway, with more than half of the residences already sold and limited two and three-bedroom apartments remaining in the East Tower release. Priced from $980,000 for two-bedroom residences and $1.46 million for three-bedroom residences, buyers can secure an apartment with a 10 per cent deposit, with premium homes offering ocean views from Level 8 and harbour views from Level 10.

ERA is also backed by Resilience Insurance's 10-year Latent Defects Insurance policy, providing protection against structural or waterproofing defects for 10 years after completion. The project is anticipated to be completed in early 2028.

[smartcode_project_cta:default project_id=135096]

From ONE to ERA: Why buyers are choosing GWH again in Newcastle West

Virgate Property Group is preparing to commence construction of Verdé, its new apartment development in Melbourne's Arts Precinct at Southbank, following a strong run of sales that has seen more than half of the project's 173 apartments secured.

Verdé has attracted a broad mix of first home buyers, owner-occupiers upgrading from nearby inner-city suburbs and investors, with younger owner-occupier couples aged between 28 and 45 accounting for the strongest enquiry. Many are already living in Southbank, South Melbourne, Albert Park, Port Melbourne, South Yarra and the CBD.

"Verdé is located in one of the most desirable pockets of southern Melbourne," Blair Property Group Director Darren Blair, who is managing sales at Verdé, said.

"It's within walking distance of the Arts Centre, Royal Botanic Gardens, Albert Park Lake, and Southbank's restaurants and retail. It's a great lifestyle location with strong amenity and liveability, which made it a very attractive choice for the project."

[smartcode_project:default project_id=4661 project_image_fid=372549]

Virgate was already familiar with the precinct, having previously delivered the successful Domain House development in neighbouring South Melbourne. That experience gave the developer confidence to acquire the Coventry Street site and continue expanding its presence in Melbourne's inner south.

"We had been keeping an eye on the site and the broader precinct for a few months before deciding to move forward with the acquisition," Virgate said.

The project was ultimately secured in 2020 following feasibility studies, planning assessments and due diligence, with the brief centred on delivering "a high-quality, considered design that feels both refined and fit for purpose."

[smartcode_project:default project_id=4661 project_image_fid=314259]

Designed by <a href="https://www.apartments.com.au/architects/bruce-henderson-architects">Bruce Henderson Architects</a>, Verdé comprises 173 one, two and three-bedroom apartments priced from $599,000. The architecture is distinguished by a faceted glass façade that responds to both the site's outlook and Melbourne's changing light conditions.

According to Bruce Henderson Architects, the coloured glazing gives the building a distinctive identity while also providing privacy and solar shading, with residences oriented to capture views across the bay, city skyline and surrounding parklands.

Inside, <a href="https://www.apartments.com.au/interior-designers/designoffice">DesignOffice</a> has created interiors focused on natural light, efficient planning and enduring materials. Apartments feature engineered oak flooring, natural stone benchtops, floor-to-ceiling glazing and SMEG appliances, while a restrained material palette aims to complement the expansive outlooks rather than compete with them.

[smartcode_project:default project_id=4661 project_image_fid=372550]

Resident amenity has also been designed around everyday functionality rather than occasional use. Facilities include a concierge-serviced lobby, residents' lounge with fireplace, library and co-working space, gym, terrace garden with barbecue facilities, ground-floor café, and package delivery management.

The project's location continues to be one of its strongest drawcards. Positioned on Coventry Street, Verdé sits within walking distance of the National Gallery of Victoria, Arts Centre Melbourne, Royal Botanic Gardens and Albert Park Lake, while Southbank's dining precinct, Sturt Street trams and the new ANZAC Station are all nearby. The surrounding education catchment also includes Melbourne Grammar, Melbourne Girls Grammar, Mac.Robertson Girls' High School and several major university campuses.

The sales team says buyers have responded particularly well to the combination of location, design quality and long-term liveability.

"They're responding really positively to the quality of the design, premium resident amenities and the uninterrupted views. Many also appreciate the location and how connected it is to everything they need."

The ability to secure stamp duty savings before completion has also been a key factor for purchasers, alongside the opportunity to personalise finishes ahead of settlement.

With construction set to commence soon and more than half the apartments already sold, Verdé enters its next phase as one of the Arts Precinct's more established apartment developments, offering remaining buyers an opportunity to secure a residence before construction advances further. Expected completion is scheduled for late 2027.

[smartcode_project_cta:default project_id=4661]

Virgate's Verdé Southbank moves toward construction as sales fly past halfway stage

Downsizer-focused apartment development Kooyongkoot in Hawthorn has been recognised at the 2026 Better Future Melbourne Design Awards, taking home Gold and Silver awards in two categories.

<a href="https://www.apartments.com.au/new-apartments/kooyongkoot-hawthorn-1-kooyongkoot-road-hawthorn-vic-3122">Kooyongkoot</a>, currently being delivered by developer PQD and designed by Cera Stribley, received Gold in the Interior Design – Proposed category and Silver in the Architecture – Proposed category.

The dual recognition reflects the design approach behind the boutique development on prestigious Kooyongkoot Road, where the focus has been on creating homes for downsizers seeking the space, quality and functionality of a detached house within a low-rise apartment building.

Rather than maximising apartment numbers, <a href="https://www.apartments.com.au/developers/pqd">PQD</a> and <a href="https://www.apartments.com.au/architects/cera-stribley-architects">Cera Stribley</a> limited the development to just 18 residences, allowing for larger floorplans, greater privacy, generous landscaping and expansive communal spaces.&nbsp;The majority of the apartments also benefit from corner aspects, allowing for dual sources of natural light.

Now around 70 per cent complete and on track for completion in November 2026, Kooyongkoot will comprise a mix of garden residences, ter​race apartments, sub-penthouses, and is crowned by two half-floor penthouses with direct lift access and private rooftop terraces.

[smartcode_project:default project_id=102717 project_image_fid=355297]

The Silver Award for Architecture recognised the way the building responds to its prominent corner position at the ent​rance to Hawthorn's Scotch Hill precinct, one of Melbourne's most established residential neighbourhoods.

Rather than competing with the grand homes that line Kooyongkoot Road, the architectural approach focused on restraint and longevity, using curved brickwork, generous landscaping and carefully considered proportions to integrate with the existing streetscape.

"The form feels fluid and timeless, as though shaped by the landscape itself – architecture that belongs, rather than competes," said Chris Stribley, Co-Founder and Managing Principal of Cera Stribley.

The judging submission also highlighted practical innovations throughout the building, including lift cores servicing only nine homes each, a central landscaped lightcourt designed to bring daylight and ventilation into the building, and fully enclosed private storage rooms with lighting, power and shelving to better accommodate residents transitioning from larger family homes.

[smartcode_project:default project_id=102717 project_image_fid=355293]

The Gold Award for Interior Design recognised the project's focus on long-term liveability rather than display-home aesthetics.

According to the awards submission, the interiors were designed from the inside out, prioritising how homes would function over decades of daily use through generous proportions, practical storage, durable natural materials and flexible layouts.

The specification includes natural stone throughout, upgraded acoustic glazing, V-ZUG appliances and fully enclosed storage rooms, alongside an amenity offering focused on wellness, entertainment and everyday convenience.&nbsp;

Residents will have access to a gym and yoga studio, a wellness centre featuring traditional and infrared saunas, a cold therapy shower and treatment room, as well as a residents' lounge and golf simulator/cinema room for entertainment.&nbsp;Kooyongkoot has also considered the everyday convenience of its residents by offering a private carwash and pet wash facilities on site as well as dedicated parcel lockers and oversized fully enclosed storage rooms.&nbsp;

[smartcode_project:default project_id=102717 project_image_fid=355303]

The project's attention to detail has already resonated with buyers. Earlier this year, Kooyongkoot recorded one of Boroondara's highest apartment sales when an $8 million penthouse was purchased by a Melbourne CEO downsizing from a nearby family home.

"Every detail feels deliberate, from the overall design down to the smallest touches," the purchaser said.

"The level of quality and refinement is exceptional, but what really sold it was how liveable it felt... It felt like a place where everything had been considered, not just a luxury building."

[smartcode_project:default project_id=102717 project_image_fid=355304]

Sustainability also formed a key part of both award submissions. Kooyongkoot is targeting a minimum 7.5-star NatHERS rating across all residences, supported by passive design principles, high-performance glazing, EV charging infrastructure, water reuse systems and a wellness model focused on lower-energy dry facilities rather than pools and large wet areas.

Located within walking distance of Scotch College, Methodist Ladies' College, Koo​yong Lawn Tennis Club, Aubur​n Village and Camberwell Junction, Kooyongkoot continues to target owner-occupiers looking to remain in Melbourne's inner east without compromising on space or quality. A limited selection of two, three and four-bedroom residences remains available, with prices starting from $1.9 million.

[smartcode_project_cta:default project_id=102717]

Kooyongkoot wins Gold and Silver at Better Future Melbourne Design Awards

New apartment supply has become increasingly constrained across <a href="https://www.apartments.com.au/developments/parramatta-nsw-2150">Parramatta</a> in recent years, with fewer projects progressing through to completion as development conditions have become more challenging.

It makes <a href="https://www.apartments.com.au/developers/novm">NOVM</a>'s 2021-completed <a href="https://www.apartments.com.au/buildings/the-lennox-parramatta-12-phillip-street-parramatta-nsw-2150">The Lennox</a> one of the most recently completed residential towers on the Parramatta River, and among the newest apartment developments in Sydney's second CBD.

With the project largely completed before the sharp escalation in construction costs and inflation following the pandemic, The Lennox is now offering pricing that would be difficult to replicate in a comparable new development in Parramatta today, or across much of Western Sydney.

The majority of the 413 apartments at The Lennox sold before and shortly after completion. A limited release of the remaining apartments has recently been brought to market by capital partner <a href="https://www.apartments.com.au/project-marketer/equitifund-group">Equitifund</a>, with entry-level pricing from $700,000 and two-bedroom apartments available from under $1 million.

Rising above the Parramatta River at 12 Phillip Street, The Lennox comprises one, two, three and four-bedroom apartments, appealing to first home buyers, young professionals, families, downsizers and interstate investors seeking a completed apartment in one of Australia's fastest-growing economic centres.

[smartcode_project:default project_id=5743 project_image_fid=372394]

Rather than positioning Parramatta as an alternative to Sydney's CBD, Equitifund believes the city has reached a point where it stands on its own merits.

"Parramatta is no longer simply an alternative to Sydney CBD, it's becoming a destination in its own right," Equitifund Executive Chairman Greg Huxley said.

"The Lennox captures that evolution with a level of quality and amenity that's difficult to match at its price point."

[smartcode_project:default project_id=5743 project_image_fid=953]

Designed by <a href="https://www.apartments.com.au/architects/marchese-partners">Marchese Partners</a>, the tower responds directly to its riverfront setting through expansive glazing and open-plan layouts that maximise views across the Parramatta River and city skyline. Interiors feature engineered timber flooring, stone benchtops, stainless steel appliances and floor-to-ceiling glazing, while generous balconies extend the living spaces outdoors.

Marchese Partners says the project was conceived to balance high-quality apartment living with practical, long-term functionality, pairing larger, efficient floorplans with amenities more commonly associated with five-star hotels.

That emphasis continues through the resident facilities, which include a 20-metre rooftop swimming pool, fully equipped gym and wellness spaces, full-time concierge, a residents' lounge, function room, private lifts, secure basement parking and rooftop communal areas overlooking the Parramatta River. Ground-floor boardwalk retail and dining further activate the riverfront and integrate the building into the surrounding public realm.

[smartcode_project:default project_id=5743 project_image_fid=925]

Australian housing and finance group Equitifund has secured the remaining apartments, believing there are few completed apartment opportunities in Parramatta that offer the same combination of location, amenity and pricing.

Equitifund National Sales Director Ben Hamblett says buyers are increasingly recognising that premium apartment living no longer needs to come with Sydney CBD pricing.

"The Lennox is where aspirational living becomes attainable," Hamblett said.

"Wake to river and mountain views, step into Sydney's Second CBD, and arrive home to resort-calibre amenities, all without the harbour price tag."

Hamblett says owner-occupiers are also attracted by the convenience of having Westfield Parramatta, Church Street's dining precinct, Parramatta Park, Riverside Theatres, Western Sydney University and major transport connections all within walking distance.

"At The Lennox, lifestyle is not an afterthought, it is the foundation."

[smartcode_project:default project_id=5743 project_image_fid=5374]

The Lennox places residents within walking distance of Parramatta Square, Westfield Parramatta, Church Street Eat Street, Parramatta Station, the ferry wharf, Light Rail, the future Sydney Metro West, Parramatta Park and CommBank Stadium, reinforcing Parramatta's position as one of Australia's most connected metropolitan centres outside Sydney's CBD.

Equitifund says buyers visiting the display suite consistently comment on the quality of the finishes, generous floorplans, river and skyline views, and the walkability of the location. The project has attracted a broad mix of local professionals, upsizers, downsizers, buyers relocating from Sydney's inner suburbs and interstate investors seeking long-term growth opportunities.

That demand aligns with Parramatta's continued evolution as an economic powerhouse. Equitifund Research and Market Insights specialist John Bekiaris says sustained population growth, infrastructure investment and expanding employment opportunities continue to support long-term housing demand across the city.

"Parramatta has evolved from a satellite city into one of Australia's most important economic centres. Population growth, infrastructure investment and employment are all supporting sustained long-term housing demand."

[smartcode_project_cta:default project_id=5743]

The apartment price gap drawing Sydney buyers west

Inflation

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EXPERT OBSERVER
The main measure of consumer prices in Australia – and a key guide to the cost of living for families – is the Consumer Price Index. In the March quarter the CPI was unchanged in original terms, the lowest result in three years. And the annual rate of inflation eased from 1.8 per cent to a 2½-year low of 1.3 per cent. 
While the cost of living has slowed markedly in the latest quarter, this is a trend that has been operating for quite some time. Over the last five years, annual inflation has averaged just 1.74 per cent – the lowest equivalent result since late in 1963. If 20-year averages are used, you would have to go back to 1952 to find a lower outcome. 
While wage growth has slowed over time, so has inflation – and to a greater extent. Aussie consumers have rarely had it better. 
But while the CPI provides a broad gauge of the cost of living, in practice living costs will vary across demographic groups and across regional areas. It all depends on the relative importance of the good or service in your household budget. Clearly younger people purchase markedly different items to those purchases by aged pensioners. 
The other important point is that living costs should be tracked in relation to incomes. For instance if wages are growing at a faster rate than prices, purchasing power will have increased, and, more broadly, the standard of living. Of course the standard of living is more subjective and may include things like traffic congestion and access to medical services. 
The other complication is the time period for measurement. The cost of living may have improved in recent times, but that may have occurred after a long period where living costs were soaring. 
The bottom line is that purchasing power has continued to improve for Australian consumers. For average wage earners, wage growth has exceeded growth of prices over the past five years and over the past decade. Quite remarkably the prices of 26 of the 87 expenditure class items tracked by the ABS are actually lower now than a decade ago. Only 16 of 87 expenditure class items have recorded faster price increases than wages over the past decade.
Living cost indexes 
The Consumer Price Index measures “price inflation for the household sector as a whole”. But to measure purchasing power for different groups in the economy, the Bureau of Statistics compiles living cost indexes. The March quarter figures were issued yesterday. The living cost index (LCI) changes were: employees (flat; +1.4 per cent annual); aged pensioners (up 0.3 per cent; +1.4 per cent annual); self-funded retirees (down 0.2 per cent; +1.6 per cent annual); ‘other government transfer recipient households’ (up 0.2 per cent; +1.6 per cent annual); pensioner and beneficiary households (up 0.3 per cent; +1.6 per cent annual). 
Over the past decade, arguably employee households have had more to celebrate than other groups. The LCI for employees lifted by only 19.3 per cent, followed by self-funded retirees (up 22.8 per cent); age pensioners (up 23.8 per cent), pensioner and beneficiary households (up 25.1 per cent) and ‘other government transfer recipient households’ (up 26.1 per cent).
Prices and incomes
Over the past five years the Consumer Price Index (CPI) rose by 8.3 per cent. And over the past decade, prices rose by 23.4 per cent. The main measure of wages is the wage price index. But data on the WPI is only available to December 2018. Still, the WPI has grown at a faster rate than prices over the past five and ten years. Wages have grown by 11.3 per cent over the past five years and grown by 30.9 per cent over the past decade. 
Using a different measure of wages – average ordinary time earnings for full-time adults – wages rose 11.7 per cent in the five years to November (December quarter) and lifted 38.6 per cent over the past decade. 
The maximum standard rate of the aged pension has lifted by 10 per cent over the past five years and increased by 53 per cent over the decade. The maximum partnered rate of the aged pension increase by 10 per cent over the past five years and increased by 38 per cent over the past decade. 
Cheaper prices 
Most Aussie consumers would be surprised at the breadth and depth of goods that have become cheaper over time. Together with items like clothes, shoes and electrical goods, cars are cheaper than a decade ago – down by over 9 per cent. And then there are staples like eggs (-0.8 per cent), bread (-0.9 per cent) and milk (-14.4 per cent).
Clothing, footwear, cars and a raft of electrical goods have become cheaper over time. In part, this is a global trend, reflecting more efficient production techniques for large scale manufactured goods. Consumers across the globe have benefitted from the greater availability of higher-quality/lower-priced goods. 
Internet purchases have also proven beneficial. Consumers can buy goods whenever they want and wherever they are. In economics, this can be explained as an expansion of supply or choice of goods – putting downward pressure on selling prices. Dearer prices
 When people bemoan the rising cost of living, they are primarily thinking about utilities, child care, education and medical services such as health insurance. The prices of these items have lifted notably over both the last five years and the past decade. 
The good news is that governments have been successful in reducing utility prices with both gas and electricity now cheaper than a year ago. Child care costs have also fallen over the past year. But health insurance fees have lifted by 4.1 per cent over the past year, well ahead of the rate of inflation.
What are the implications?
The conventional wisdom is that the cost of living is soaring. The reality is that the cost of living is growing at the slowest pace in a generation. Now while the cost of living is rising as it always does in a growing economy, annual inflation has actually eased – not just in the past five years but on far longer timeframes.
Our parents and grandparents would been accustomed to inflation rates near 2 per cent and indeed current-day inflation is more akin to that seen in the 1950s and 1960s. 
A raft of goods and services has become cheaper – not just over the past year but many items are cheaper than a decade ago. Thank technology, thank the efficiency and productivity of businesses across the globe.
While price growth has eased, so has wage growth. In a globalised world, businesses are finding it harder to lift prices of their finished products or services. So it is harder for companies to give out pay increases similar to those awarded a decade ago.
Importantly, incomes are growing at a faster pace than prices, so many goods and services have become more affordable.
In the globalised world, businesses needs to stand out. That is, businesses need to find that point of difference with their competitors or their ‘uncommon offering’. Aussie businesses not only can win more market share at home, they can tap into the global marketplace.
Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.
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cjames-5S2v74qSNK

Inflation is at a 55-year low: CommSec's Craig James

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EXPERT OBSERVATION
Surprisingly weak Australian inflation has led to expectations the Reserve Bank will soon cut rates. But what’s driving low inflation? Is it really that bad? Why not just lower the inflation target? Will rate cuts help? And what does it mean for investors?
Inflation surprises on the downside again Australian inflation as measured by the CPI was flat in the March quarter and up just 1.3% over the last year. Sure, the zero outcome in the quarter was partly due to a nearly 9% decline in petrol prices and they have since rebounded to some degree. And high-profile items like food, health and education are up 2.3%, 3.1% and 2.9% respectively from a year ago. But against this price weakness is widespread in areas like clothing, rents, household equipment and services and communications.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/4/26/New%20Project%208.jpg" alt="">
Source: ABS, AMP Capital
But why the focus on “underlying inflation”? The increase in the CPI is the best measure of changes in the cost of living. But it can be distorted in the short term by often volatile moves in some items that are due to things like world oil prices, the weather and government administered prices that are unrelated to supply and demand pressures in the economy.
So, economists and policy makers like the RBA focus on what is called underlying inflation to get a handle on underlying price pressures in the economy so as not to jump at shadows. There are various ways of measuring this ranging from excluding items like food and energy as in the US version of core inflation, to excluding items whose prices are largely government administered to statistical measures that exclude items that have volatile moves in each quarter (as with the trimmed mean and weighed median measures of inflation). Right now they all show the same thing ie that underlying inflation is low ranging between 1.2% to 1.6% year on year. The average of the trimmed mean and weighted median measures is shown in the previous chart and is averaging 1.4%. The common criticism of underlying inflation that “if you exclude everything there is no inflation” is funny but irrelevant. The point is that both headline and underlying inflation are below the RBA’s 2-3% target and this has been the case for almost four years now.
What is driving low inflation?
The weakness in inflation is evident globally. Using the US definition, core (ex food and energy) inflation is just 1.8% in the US, 0.8% in the Eurozone, 0.4% in Japan and 1.8% in China.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/4/26/New%20Project%209.jpg" alt="">
Sources: Bloomberg, AMP Capital
Several factors have driven the ongoing softness in inflation including: the sub-par recovery in global demand since the GFC which has left high levels of spare capacity in product markets and underutilisation of labour; intense competition exacerbated by technological innovation (online sales, Uber, Airbnb, etc); and softish commodity prices. All of which has meant that companies lack pricing power and workers lack bargaining power.
Why not just lower the inflation target?
Some suggest that the RBA should just lower its inflation target. This reminds me of a similar argument back in 2007-08, when inflation had pushed above 4%, that the RBA should just raise its inflation target. Such arguments are nonsense. First, the whole point of having an inflation target is to anchor inflation expectations. If the target is just raised or lowered each time it’s breached for a while then those expectations - which workers use to form wage demands and companies use in setting wages and prices - will simply move up or down depending on which way inflation and the target moves. And so inflationary or deflationary shocks will turn into permanent shifts up or down in inflation. Inflation targeting would just lose all credibility.
Second, there are problems with allowing too-low inflation. Mostcentral bank inflation targets are set at 2% or so because statistical measures of inflation tend to overstate actual inflation by 1-2% because statisticians have trouble actually adjusting for quality improvements and so some measured price rises often reflect quality improvements. In other words, 1.3% inflation as currently measured could mean we are actually in deflation. And there are problems with deflation.
What’s wrong with falling prices (deflation) anyway?
Deflation refers to persistent and generalised price falls. It occurred in the 1800s, 1930s and the last 20 years in Japan. Most people would see falling prices as good because they can buy more with their income. However, deflation can be good or bad. In the period 1870-1895 in the US, deflation occurred against a background of strong growth, reflecting rapid technological innovation. This can be called “good deflation”.
However, falling prices are not good if they are associated with falling wages, rising unemployment, falling asset prices and rising real debt burdens. For example, in the 1930s and more recently in Japan. This is “bad deflation”. Given high debt levels, sustained deflation could cause big problems. Falling wages and prices would make it harder to service debts. Lower nominal growth will make high public debt levels harder to pay off. And when prices fall people put off decisions to spend and invest, which could threaten economic growth. This could risk a debt deflation spiral of falling asset prices and falling incomes leading to rising debt burdens, increasing defaults, spurring more falls in asset prices, etc.
The problem for RBA credibility?
The problem for the RBA is that inflation has been undershooting its forecasts and the target for several years now. The longer this persists the more the RBA will lose credibility, seeing low inflation expectations become entrenched making it harder to get inflation back to target and leaving Australia vulnerable to deflation in the next economic downturn.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/4/26/New%20Project%2010.jpg" alt="">
Source: RBA, Bloomberg, AMP Capital
Due to the slowdown in economic growth flowing partly from the housing downturn we have been looking for two rate cuts this year since last December. We had thought that the RBA would prefer to wait till after the election is out of the way before starting to move and coming fiscal stimulus from July also supports the case to wait as does the still strong labour market.
However, with underlying inflation coming in much weaker than expected the RBA its arguably too risky to wait until unemployment starts to trend up. And the RBA has moved in both the 2007 and 2013 election campaigns. So, while it’s a close call our base case is now for the first rate cut to occur at the RBA’s May meeting. Failing that, then in June.
Will the banks pass on RBA rate cuts?
This has been an issue with all rate cuts since the GFC due to a rise in bank funding costs. But most cuts have been passed on largely or in full (the average pass through since the Nov 2011 cut has been 89%), notwithstanding out of cycle hikes. Short term funding costs have fallen lately pointing to a reversal of last year’s 0.1 to 0.15% mortgage rate hikes or at least the banks having little excuse not to pass on any RBA cuts in full.
But will more rate cuts help anyway?
Some worry that rate cuts won’t help as they cut the spending power of retirees and many of those with a mortgage just maintain their payments when rates fall. However, there are several points to note regarding this.
First, the level of household deposits in Australia at $1.1 trillion is swamped by the level of household debt at $2.4 trillion. So the household sector is a net beneficiary of lower interest rates.
Second, the responsiveness to changes in spending power for a family with a mortgage is far greater than for retirees.
Third, even if many with a mortgage just let their debt get paid off faster in response to falling rates this still provides an offset to the negative wealth effect of falling house prices, reducing pressure to cut spending.
Fourth, the fall in rates since 2011 has helped the economy keep growing as mining investment collapsed. And of course,
RBA rate cuts help push the $A lower. So, while rate cuts may not be as potent with higher household debt levels today and tighter bank lending standards, they should provide some help.
Is the RBA out of ammo?
This is a common concern around major central banks. However, they are a long way from being unable to do anything:
the Fed can reverse the 9 rate hikes seen since December 2015 and start quantitative easing again if needed; and both the ECB and Bank of Japan could expand their QE programs. The ultimate option is for central banks to provide direct financing of government spending or tax cuts using printed money. This is often referred to as “helicopter money”. Fortunately, non- traditional monetary policy has worked in the US and so at least these concerns are unlikely to need to be tested. Of course, the RBA still has plenty of scope to cut interest rates if needed (there is 150 basis points to zero) and it could still do quantitative easing if needed so it’s a long way from being out of ammo (not that we think it needs to do a lot more anyway).
Implications for investors?
There are a number of implications for investors. First, low interest rates will remain in place for some time keeping bank deposit rates unattractive. Second, given the absence of inflationary pressure, a 1994-style bond crash remains distant.
Third, the low interest rate environment means the chase for yield is likely to continue supporting commercial property, infrastructure and shares offering sustainable high dividends.
Fourth, an earlier RBA rate cut may bring forward the timing of the bottom in Australian house prices.
Finally, as can be seen in the next chart, low inflation is generally good for shares as it allows shares to trade on higher price to earnings multiples. But deflation tends to be bad for shares as it tends to go with poor growth and profits and as a result shares trade on lower PEs. The same would apply to assets like commercial property and infrastructure.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/4/26/New%20Project%2011.jpg" alt="">
Source: Global Financial Data, Bloomberg, AMP Capital
Dr Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital.
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Why is inflation such a concern for the RBA - and for us? AMP's Shane Oliver

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EXPERT OBSERVATION 
The Australian March quarter Consumer Price Index showed flat headline inflation over the quarter and annual inflation falling to 1.3%, missing expectations of a 0.2% quarter on quarter rise.
The bigger downside surprise came from weaker underlying inflation.
Underlying inflation, as measured by the trimmed mean and weighted median, averaged 0.2% over the quarter and 1.4% over the year which missed consensus expectations of 0.4% quarter on quarter and 1.7% year on year.
The RBA uses underlying inflation as the best guide to fundamental price trends in the economy because it excludes volatile price changes.
Inflation continues to track below the RBA’s 2-3% target band (see chart below) and the central bank is likely to revise down its inflation forecasts.
<img src="https://www.urban.com.au/images/2019/4/19/abs%20.png" alt="">
Source: ABS, AMP Capital
In the March quarter, the largest price rises came from the usual seasonal sources (education and medical services), a lift in motor vehicle prices and a rise in food prices (particularly vegetables). But these were offset by price falls for fuel (given a sharp decline in petrol prices) and domestic and international holiday travel (a seasonal effect). 
While the petrol price has since bounced back the lack of underlying pricing pressure in the economy is evident in pricing weakness across areas like clothing, rents, household equipment and services and communications. The weakness in underlying inflation shows that businesses are still finding it challenging to lift prices in the face of ongoing spare capacity, intense competition and weak demand.
Other measures of underlying inflation also remain very low. Inflation excluding food and energy, which is the US core measure of inflation, is running at just 1.3% year on year (in the US its running at 2% year on year) and inflation in the private sector of the economy (excluding volatile items) is at 1.4% year on year (as measured by the “market goods and services ex volatiles items” index).
Implications
The weakness in Australian inflation confirms the spare capacity remains significant in the economy. With GDP growth expected to remain low in 2019 – at around 2.3% - spare capacity and weak demand will continue to put downward pressure on prices and wages.
The March quarter inflation data missed the RBA forecasts (see chart below), which continues the trend over the past few years of the RBA overestimating inflation, and means that the central bank is likely to downgrade its inflation forecasts yet again next month. The longer inflation undershoots the 2-3% target, the greater the risk that the target will lose credibility. This in turn will see low inflation expectations become more entrenched making it in turn even harder to get inflation back to target. 
Lowering the target would be a huge mistake and would see inflation targeting lose all credibility and only lock in low inflation (and the risk of deflation) for longer.
<img src="https://www.urban.com.au/images/2019/4/19/abs%202.png" alt="">
Source: ABS, AMP Capital
We have been looking for two rate cuts this year since last December and had thought that the RBA would wait till after the election before starting to move. However, with underlying inflation coming in much weaker than expected our base case is now that the first cut will come next month, with the RBA likely to conclude that it’s too risky to wait until unemployment starts to trend up.
Shane Oliver is Head of Investment Strategy and Chief Economist AMP Capital.
Diana Mousina is an Economist at AMP Capital. 
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j.ballantyne1990-6AQqhLzZaK

RBA rate cuts imminent, probably starting in May: Shane Oliver

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EXPERT OBSERVER
More and more evidence. Inflation across Asia keeps sliding. India's dipped further in January to a touch above 2% y-o-y. In China, the PPI barely held in positive territory last month, and consumer inflation cooled again. It's easy to shrug it all off as a temporary drag from lower oil prices and well-behaved food cost. But that's not the full story: underlying price pressures are remarkably soft as well and broadly falling. As a result, real interest rates continue to climb and the region's already substantial debt load becomes harder to service. The case for further monetary easing may thus become more pressing, even if in itself this may not be enough to push up growth materially.
You will have seen the headlines. Over the past week alone, both India and China reported remarkably subdued inflation. In India, the headline CPI is running at close to half the central bank's mid-point target. True, core prices are well above this (around 5.4%), but that was down from a 6% handle. In China, PPI inflation, a good proxy for industrial profits, has essentially stalled and the headline CPI hit 1.7% (though core nudged up to 1.9%).
Elsewhere, the trend is much the same: from Indonesia to Thailand to Korea, including Japan and Australia, and everywhere in between, inflation is running short. Even in the Philippines, which saw a sharp spike last year, it's rapidly coming off the boil.
It's tempting to attribute much of this to falling oil prices. And as these are now ticking up, that drag is bound to reverse. Plus, food inflation has been remarkably subdued across the region of late (keep an eye though on the return of El Nino this year).
However, core inflation is running at a fairly tepid pace in most places, or at least showing signs of slowing substantially. From a broader perspective, in fact, it is remarkable that the synchronized global upswing in 2016-2017, followed by last year's exchange rate stumbles and, temporarily at least, soaring oil prices, didn't deliver a bigger inflation kick (see also We got an inflation problem, 10 December, 2018).
That means that the "jumping off point" for inflation as growth continues to slow is dangerously low, risking, if not outright deflation, a prolonged period of extremely subdued price pressures.
That poses two big challenges for Asia.
First, it pushes up real interest rates as low (or even lower) inflation increasingly pushes down inflation expectations. And with nominal rates already near record lows in many places, there's little that a loosening in monetary policy alone can do to correct this.
Second, and related, the debt service burden increases as inflation falls short. Even if inflation expectations, which determine the real interest rate, don't fall further, lower realized inflation makes it harder to service debt already taken out. And since the region has splurged on the stuff in recent years, falling price pressures can thus act as a powerful drag on growth.
What, then, are the policy options?
Monetary easing is the obvious one. But, as mentioned, this has started to run into "diminishing returns": with interest rates already low, further cuts will provide only a limited boost. Ideally, this should be complemented by fiscal easing. And in a few places, notably China, that's exactly what's occurring. But, more broadly across Asia, the policy room for a significant fiscal kick is limited (see How much policy room?, 28 January, 2019).
Further out, Asian central bankers will also need to think about more unorthodox policies. If rate cuts alone don't do the trick, and fiscal support isn't readily available, at least in sufficient size, the entire tool box of policies tried out in advanced economies over the past decade should be on the table: from targeted lending schemes to aggressive base money expansion.
Granted, these didn't work necessarily all too well in all instances. And emerging Asia isn't quite yet so demand deprived that it's about to fall into a deflationary trap.
Yet, given the growing risks of such a stumble, it's probably best to act pre-emptively.
Cuts anyone?
Frederic Neumann is Co-head of Asian Economics Research at HSBC.
 
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The dangerous inflation fizzle: Frederic Neumann

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<div>
EXPERT OBSERVATION
</div>
The December Quarter CPI printed 0.5%qtr, compared to the market median of 0.4% and Westpac’s forecast for 0.3%. At two decimal places, the rise in the CPI was 0.53%qtr, so a hard 0.5%. With base effects, the annual rate has eased back to 1.8%yr compared to 1.9%yr in Q3, 2.1%yr in Q2 and 1.9% in Q1. But with another sub 0.6% print, the six month annualised pace is down to 1.2%yr (using seasonally adjusted data – raw CPI six month annualised is 2.0%yr but this incorporates a seasonally stronger pace in H2). Inflation continues to bump along just at, or just under, the bottom of the RBA’s target band.
Following the December quarter 2017 CPI, we argued that searching for inflation in the Australian economy has been as fruitless as Vladimir and Estragon’s wait for Godot. While this report does suggest we have at least found a bottom in the disinflationary pulse, it is still too early to call an inflationary pulse is underway and there are some hints in the December 2018 report that the current scenario has much longer to run.
The average of the core measures, which are seasonally adjusted and exclude extreme moves, rose 0.4%qtr meeting market expectations. In the quarter, the trimmed mean gained 0.43% while the weighted median lifted 0.36%. The annual pace of the average of the core measures printed 1.8%yr which is the same as the September quarter print.
Incorporating revisions, the six month annualised growth in core inflation is 1.8%yr which is well below the bottom of the RBA target band and the slowest pace June 2016.
<img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/bulletin/Justin_Images/JanFeb19/Dec2018CPI.jpg" alt="CPi">
<div>
A small number of upside surprises but nothing that changes the fundamental picture
</div>
Some standouts in the quarter – on the positive side there was a stronger rise in alcohol &amp; tobacco (3.2% vs 2.8% expected), a surprising rise in utilities (0.1% vs –0.3% expected), a smaller fall in auto fuel (–2.5 vs –4.2% expected), a surprising jump in household contents &amp; services (0.5% vs –0.5% expected) and a stronger bump in holiday travel (2.6% vs 1.6% expected all due to strong domestic holiday prices). On the downside, food rose just 0.9% (1.2% expected) due to a smaller than expected rise in fresh fruit &amp; vegetables, clothing &amp; footwear fell –0.2% (a small rise was expected). Everything else came in close to expectations or just slightly stronger.
We think is worth noting the continued modest gains for housing expenditure. Housing costs overall rose as expected (0.2%) rents rose 0.2% (we thought they would be flat), dwelling prices rose just 0.4% (as we expected) while utilities rose 0.1% vs our –0.3% expected. The surprise in utilities was the jump in electricity prices that outweighed the normal seasonal fall in gas prices. 
There remains a number of near term negative risks for both rents and dwelling purchase costs in NSW and Victoria. Given that rents and dwelling purchases are worth around 15% of the CPI on their own, this is significant for headline inflation, and even more so for core, where their weight is somewhat higher.
Tradables fell 0.3% in the December quarter. The tradable goods component fell –0.1% due to automotive fuel (-2.5%), audio, visual &amp; comp equipment (-3.3%) and wine (-1.9%). The tradable services component fell 0.7% due to international holiday travel &amp; accommodation (-0.8%).
Non-tradables component rose 0.9% in the December quarter. The non-tradable goods component rose 1.5%, due to the excise tax increase for tobacco (9.4%). The non-tradable services component rose 0.6%, due to domestic holiday travel &amp; accommodation (6.2%).
<img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/bulletin/Justin_Images/JanFeb19/DecCPIComp.jpg" alt="CPICop">
<div>
Low inflation remains embedded in the economy
</div>
For the first time in two years inflation forecasters have underestimated the quarterly rise in the CPI. Does this signal a turnaround and the return of a more sustainable inflationary pulse? We don’t think so. While there are some isolated inflationary pressures; tobacco prices are clear standouts as well as embryonic indicators that the disinflationary pulse in retail, particularly in the household goods &amp; services and domestic holidays &amp; travel, may be ending. But, we are still seeing weakness in clothing and footwear while the moderation in housing costs (rents and dwelling purchases in particular) is a significant offset. We are, however, watching the surprising bump in electricity prices to see if this continues.
As housing has a significant group weighting in the CPI (15%) it has a meaningful impact on the estimates of both inflation and core inflation. As such, with core inflation below the bottom of the RBA’s target band we can find little to suggest any risk of a meaningful acceleration.
Justin Smirk is senior economist at Westpac.
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An upside surprise but inflation remains well contained: Justin Smirk

Australian inflation continues declining: Shane Oliver

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This week, inflation and the housing market have been in focus for Australia. Offshore, data for the US remained robust, but was less so in Europe and Emerging Asia.
Australian inflation has been an enduring disappointment for the market, with actual outcomes having come in below expectations quarter by quarter for close to two years. The September quarter continued this trend, with headline and the average of the core measures again sub-consensus at 0.4% (market 0.5%) and 0.3% (market 0.4%). More significant for policy, annual headline and core inflation again fell below the 2.0%yr lower bound of the RBA’s inflation range, now 1.9%yr and 1.7%yr.
Within the quarter, there were many opposing influences, but the main theme was the offsetting of petrol and tobacco inflation by disinflation across house purchase costs and rents and the continued absence of pricing power for the retail sector. Though petrol will remain inflationary in coming months, persistent weakness in housing costs will limit the net effect for headline inflation. As the core measure typically omits energy costs, the effect here will be lopsided and result in annual core inflation holding below the RBA’s 2-3%yr target range through the end of 2019. Together with GDP growth tending back to trend in 2019, this trend will see the RBA remain on hold through 2020.
The soft housing inflation pulse is a consequence of declining house prices and rising supply (restricting rental growth). This week, the October CoreLogic house price data showed that this national decline in house prices is continuing. The decline is led by Sydney (-7.4%yr) and the top end of the market (the top 25% of sales by price down 7.7%yr versus -0.9%yr for the bottom 25%). However, we continue to see evidence of the weakness broadening, with 80% of dwellings now having seen price declines over the past six months compared to 60% for the past year. By dwelling type, losses remain largest for houses. This is consistent with the relative outperformance of houses over apartments to the cycle peak, but is also evidence that increasing apartment supply is yet to affect the price trend materially.     
Dwelling approvals data for September was also released this week. While a bounce was seen in the month, approvals are still down 14% over the year. Further, if high-rise approvals in Victoria are omitted, we estimate approvals actually fell 7.5% in September, with the weakness broad-based by state and dwelling type. Given this trend decline in prices and approvals, it is unsurprising that housing credit growth continues to decelerate. In 3-month annualised terms, total housing credit has slowed from 6.8% in May 2017 to 4.7% currently. Though investor credit has been the primary driver of this softening, owner-occupier credit has also slowed, from 8.7% in July 2017 to 6.4% currently.     
Turning to the US, GDP was again strong in the September quarter at 3.5% annualised. Driving the result was a willing consumer, with growth in this sub-sector rising 4.0% annualised – well ahead of the average of the post-GFC period. Elsewhere however, there were a number of signs that higher interest rates are beginning to take effect. This was most obvious in residential construction, now down around 3% annualised over the past nine months. More important for the economy are glimpses of weakness in business investment following a strong start to the year. The latter deceleration fits well with regional business survey detail on investment intentions, hit by trade policy uncertainty, as well as core orders and shipments, which were flat through the September quarter.
For growth to persist at an above-trend pace, consumption must continue to fire. On this front, the upside surprise for the employment cost index in the third quarter, a 0.8% gain for total compensation, was promising. That said, annual income growth still remains relatively modest at 2.8%yr. To sustain the current pace of consumption, quarterly gains nearer 1.0% are consistently needed. We are not convinced this will occur. Instead, together with tighter financial conditions, we foresee a stabilisation in nominal household incomes around 3.5%yr in 2019. Absent dissaving, this would be consistent with real household consumption closer to 2.5-3.0% annualised than the current 4.0% pace. If consumption does slow, then together with a softening pulse for business investment and the loss of extraordinary support from fiscal policy (in late 2019), US growth will slow back to trend during 2019 and result in the FOMC going on hold after three more rate hikes to June 2019.
While debate over the US economy remains focused on whether growth will be at or above trend, for Europe the risk of sub-trend growth is building. From 2.7%yr in 2017, growth slowed to a 1.6% annualised pace in the first half of 2018. And now the first estimate for the September quarter has disappointed, coming in at just 0.8% annualised, below our estimate of trend growth, 1.2%yr. One-off factors were reportedly at play in the most recent three months, so more time is arguably needed to assess the trend. External demand has been the primary reason growth has slowed in 2018, but looking forward, domestic political risks are paramount. In addition to concerns over Italy, this week, the source of uncertainty was in Germany with Chancellor Angela Merkel announcing that she will not contest her CDU Party leadership this December. She intends to remain as Chancellor until the end of the Coalition Government’s term in 2021, but will not stand for re-election.
In the UK, the Brexit deadline grows nearer. With those clouds up ahead, the BoE left rates on hold this week while retaining their gradual tightening bias. The economy is described as “broadly in balance” with the domestic labour market tight and wages growth picking up more than expected. Indeed, if it were not for Brexit uncertainty, the Bank rate would be higher, with the BoE signalling that a smooth Brexit would see a steeper rate path.   
Finally to Asia, there we have seen moderating global growth and US trade policy continue to weigh on the manufacturing sector of China and other east Asian nations. For China in particular, domestic demand remains a positive, aided of late by stabilising business and infrastructure investment. However, going forward, the downtrend in employment growth poses a risk. This highlights why authorities are becoming more active in the management of the domestic economy and US’ tariffs effect on China’s external competitiveness.
Elliot Clarke is a Senior Economist for Westpac
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Housing is subduing inflation: Elliot Clarke

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EXPERT OBSERVER
It is hard to find signs of rising inflationary pulse
The September Quarter CPI printed 0.4%qtr, compared to the market median and Westpac’s forecast for 0.5%. At 2 decimal places the rise in the CPI was 0.44%qtr so a sound 0.4% but it was the third consecutive 0.4% print holding the six month annualised pace at 1.6%yr. With base effects, the annual rate has eased back to 1.9%yr compared to 2.1%yr in Q2, 1.9% in Q1 and 2017 Q4 and 1.8%yr in Q3. Inflation continues to bump along just at, or just under, the bottom of the RBA’s target band.
Following the December quarter 2017 CPI we argued that searching for inflation in the Australian economy has been a fruitless as Vladimir and Estragon’s wait for Godot. This has not changed as we are still waiting to see how long this record breaking performance can continue. There were some hints in the September suggesting this scenario has much longer to run.
The average of the core measures, which are seasonally adjusted and exclude extreme moves, rose 0.3%qtr meeting our expectations. In the quarter, the trimmed mean gained 0.37% while the weighted median lifted 0.28%. The annual pace of the average of the core measures printed 1.7%yr, a further deceleration from 1.7%yr in Q2 2018 and 2.0% in Q1.
Incorporating revisions, the six month annualised growth in core inflation is only 1.5%yr which is well below the bottom of the RBA target band and the slowest pace September 2016.
<img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/bulletin/Justin_Images/Sept_OCt18/sept18CPIchart.JPG" alt="CPI " title="history">
Components of the CPI broadly as expected but some interesting surprises in the finer details
Some standout in the quarter – on the positive side there was a bump from food (0.5%),and surprising rise for clothing &amp; footwear (0.2% vs –0.3% expected), rising auto fuel (1.4%) and a larger than expected seasonal bump in holiday travel (3.3%). On the downside, the bump from tobacco was less than expected (just 1.8%) while health costs fell more than expected (–0.4%), car prices fell again (–0.1%) and the fall in household content &amp; services was larger than expected (–1.2%) with a larger than expected 12% fall in child care. We had highlight child care as a clear risk to our forecasts.
The most interesting new bit of information in the survey was for housing expenditure. While housing costs overall rose as expected (0.4%) rents rose 0.2% (we thought they would be flat), dwelling prices rose just 0.1% (we thought 0.4%) while utilities rose 0.8% vs our –0.4% expected. Overall the mix on housing is softer than expected as there are a number of near term negative risks for both rents and dwelling purchase costs in NSW and Victoria. Given that rents and dwelling purchases are worth around 15% of the CPI their own this is significant for headline and inflation even more so for core where their weight is somewhat higher.
<img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/bulletin/Justin_Images/Sept_OCt18/Sep18CPIcontribs.JPG" alt="CPI " title="contribs">
Tradables rose 0.8% in the September quarter. The tradable goods component rose 0.4% due to automotive fuel (1.4%), fruit (2.4%), furniture (1.9%), and vegetables (1.6%). The tradable services component rose 4.0% due to international holiday travel &amp; accommodation (4.3%).
Non-tradables rose 0.3% in September quarter. The non-tradable goods component rose 0.5% due to tobacco (1.8%), beer (0.9%) and takeaway &amp; fast foods (0.7%). The non-tradable services component rose 0.1% due to domestic holiday travel &amp; accommodation (2.4%) and property rates &amp; charges (2.3%).
Low inflation remains embedded in the economy
We have now two consecutive years where forecasters have over-estimated the CPI print. The average error since the December quarter 2016 is +0.14ppt. Core inflation came in below expectations (0.3%qtr vs 0.4%qtr expected) but there error on core inflation is more random and does not have a consistent bias. The average error on core since December 2016 is just 0.006ppt. So analysts are broadly getting the core inflation pulse corrected but are still underestimating the disinflationary pulse which has seen greater than usual discounting in some sectors \which are then trimmed out of the core measures.
There are some isolated inflationary pressures; rising petrol and tobacco prices are clear standout as well as embryonic indicators that disinflationary pulse in retail may be easing but the moderation in housing costs (rents and dwelling purchases in particular) are a significant offset. This is significant as this group weighting means it has a meaningful impact on the estimates of both inflation and core inflation. As such, with core inflation well below the bottom of the RBA’s target band we can find little to suggest any risk of a meaningful acceleration.
Our preliminary estimate for the 2018 Q3 CPI is 0.7%qtr which will see the annual pace lift a touch to 2.0%yr as the recent rise in petrol prices makes a larger contribution in the December quarter. We are also expecting a modest recovery in dwelling purchase prices. Under our current scenario, even with a modest lift in housing costs and rising fuel prices inflation, inflation is expected to be at, or just under, 2.0%yr all the way out to end 2019.
On a festive note the ABS reports that this is the 70th birthday of the CPI in it’s current form – the index has quarterly history that goes back to the September quarter 1948.
Justin Smirk is a Senior Economist at Westpac
<div style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">
<h1 style="box-sizing: border-box; font-size: 36px; margin: 18px 0px; color: #621a4b; font-family: ChronicleSemibold, 'Times New Roman', Times, -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; line-height: 1.1;">It is hard to find signs of rising inflationary pulse</h1>
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<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">The September Quarter CPI printed 0.4%qtr, compared to the market median and Westpac’s forecast for 0.5%. At 2 decimal places the rise in the CPI was 0.44%qtr so a sound 0.4% but it was the third consecutive 0.4% print holding the six month annualised pace at 1.6%yr. With base effects, the annual rate has eased back to 1.9%yr compared to 2.1%yr in Q2, 1.9% in Q1 and 2017 Q4 and 1.8%yr in Q3. Inflation continues to bump along just at, or just under, the bottom of the RBA’s target band.
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">Following the December quarter 2017 CPI we argued that searching for inflation in the Australian economy has been a fruitless as Vladimir and Estragon’s wait for Godot. This has not changed as we are still waiting to see how long this record breaking performance can continue. There were some hints in the September suggesting this scenario has much longer to run.
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">The average of the core measures, which are seasonally adjusted and exclude extreme moves, rose 0.3%qtr meeting our expectations. In the quarter, the trimmed mean gained 0.37% while the weighted median lifted 0.28%. The annual pace of the average of the core measures printed 1.7%yr, a further deceleration from 1.7%yr in Q2 2018 and 2.0% in Q1.
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">Incorporating revisions, the six month annualised growth in core inflation is only 1.5%yr which is well below the bottom of the RBA target band and the slowest pace September 2016.
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;"><img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/bulletin/Justin_Images/Sept_OCt18/sept18CPIchart.JPG" alt="CPI " title="history" style="box-sizing: border-box; max-width: 100%;">
<div style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">
<h1 style="box-sizing: border-box; font-size: 36px; margin: 18px 0px; color: #621a4b; font-family: ChronicleSemibold, 'Times New Roman', Times, -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; line-height: 1.1;">Components of the CPI broadly as expected but some interesting surprises in the finer details</h1>
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<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">Some standout in the quarter – on the positive side there was a bump from food (0.5%),and surprising rise for clothing &amp; footwear (0.2% vs –0.3% expected), rising auto fuel (1.4%) and a larger than expected seasonal bump in holiday travel (3.3%). On the downside, the bump from tobacco was less than expected (just 1.8%) while health costs fell more than expected (–0.4%), car prices fell again (–0.1%) and the fall in household content &amp; services was larger than expected (–1.2%) with a larger than expected 12% fall in child care. We had highlight child care as a clear risk to our forecasts.
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">The most interesting new bit of information in the survey was for housing expenditure. While housing costs overall rose as expected (0.4%) rents rose 0.2% (we thought they would be flat), dwelling prices rose just 0.1% (we thought 0.4%) while utilities rose 0.8% vs our –0.4% expected. Overall the mix on housing is softer than expected as there are a number of near term negative risks for both rents and dwelling purchase costs in NSW and Victoria. Given that rents and dwelling purchases are worth around 15% of the CPI their own this is significant for headline and inflation even more so for core where their weight is somewhat higher.
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;"><img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/bulletin/Justin_Images/Sept_OCt18/Sep18CPIcontribs.JPG" alt="CPI " title="contribs" style="box-sizing: border-box; max-width: 100%;">
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">Tradables rose 0.8% in the September quarter. The tradable goods component rose 0.4% due to automotive fuel (1.4%), fruit (2.4%), furniture (1.9%), and vegetables (1.6%). The tradable services component rose 4.0% due to international holiday travel &amp; accommodation (4.3%).
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">Non-tradables rose 0.3% in September quarter. The non-tradable goods component rose 0.5% due to tobacco (1.8%), beer (0.9%) and takeaway &amp; fast foods (0.7%). The non-tradable services component rose 0.1% due to domestic holiday travel &amp; accommodation (2.4%) and property rates &amp; charges (2.3%).
<div style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">
<h1 style="box-sizing: border-box; font-size: 36px; margin: 18px 0px; color: #621a4b; font-family: ChronicleSemibold, 'Times New Roman', Times, -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; line-height: 1.1;">Low inflation remains embedded in the economy</h1>
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<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">We have now two consecutive years where forecasters have over-estimated the CPI print. The average error since the December quarter 2016 is +0.14ppt. Core inflation came in below expectations (0.3%qtr vs 0.4%qtr expected) but there error on core inflation is more random and does not have a consistent bias. The average error on core since December 2016 is just 0.006ppt. So analysts are broadly getting the core inflation pulse corrected but are still underestimating the disinflationary pulse which has seen greater than usual discounting in some sectors \which are then trimmed out of the core measures.
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">There are some isolated inflationary pressures; rising petrol and tobacco prices are clear standout as well as embryonic indicators that disinflationary pulse in retail may be easing but the moderation in housing costs (rents and dwelling purchases in particular) are a significant offset. This is significant as this group weighting means it has a meaningful impact on the estimates of both inflation and core inflation. As such, with core inflation well below the bottom of the RBA’s target band we can find little to suggest any risk of a meaningful acceleration.
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">Our preliminary estimate for the 2018 Q3 CPI is 0.7%qtr which will see the annual pace lift a touch to 2.0%yr as the recent rise in petrol prices makes a larger contribution in the December quarter. We are also expecting a modest recovery in dwelling purchase prices. Under our current scenario, even with a modest lift in housing costs and rising fuel prices inflation, inflation is expected to be at, or just under, 2.0%yr all the way out to end 2019.
<p style="box-sizing: border-box; color: #2d373e; font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Fira Sans', 'Droid Sans', 'Helvetica Neue', sans-serif; font-size: 14px;">On a festive note the ABS reports that this is the 70th birthday of the CPI in it’s current for – the index has quarterly history that goes back to the September quarter 1948.
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It is hard to find signs of rising inflationary pulse: Westpac's Justin Smirk

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EXPERT OBSERVER
For Australia, the past seven days have been focused on the labour market, with updates for wage growth and employment received.
On employment, the 4k decline in jobs in the month of July was well below the market’s expectation, but in line with our own. Given it follows an outsized 58k gain in June, the weak July outcome is certainly not a cause for concern. Indeed the past three months have seen an average monthly gain of 22k, ahead of the 18k trend pace of growth. Looking ahead, we anticipate that momentum in employment will slow in the second half of 2018.
Based on employment growth, wages growth should be much stronger than the 2.1% reported for the year to June 2018. Here we see the impact of the underutilisation of workers which, in our view, is set to remain a significant concern hence. Broadly we believe this under-reported slack will hold nominal wage inflation around 2.0% through the remainder of 2018 and 2019 and, as a consequence, real wage growth will be negligible. This situation will continue to weigh on households’ perceptions of their family finances and willingness to spend.
Another important consequence of inflation persistently at the lower-bound of the RBA’s target range and weak (or no) real wage growth is that household’s inflation expectations are suppressed. Our Chief Economist Bill Evans has taken up this important topic this week. The take-home point for policy is that “there must be a risk that, at least from an expectations perspective, low inflation is embedded in the system for longer than the Bank and the market are currently expecting”.
Outturns as above would be a stark contrast to the positive expectations of the Government and the RBA – the latter re-iterated during Governor Lowe’s appearance before the House of Representative’s Standing Committee on Economics this week. This is why we believe aggregate growth in 2019 will be sub-trend, and that the RBA will remain on hold into 2020.
Turning to the US, the New York Federal Reserve’s consumer credit survey was the highlight, but out of the headlines. Conflict between the US and Turkey instead remained front of mind for the press. This is a highly uncertain situation, and is unlikely to be resolved soon. We are not overly concerned by the effect this situation will have on global trade or growth, but we are mindful of potential spill-over effects to the European banking sector (who have considerable exposure to Turkish corporates) and to sentiment towards other emerging markets. Developing nations geographically near Australia are in a far better situation than Turkey and where they were in the late-1990’s (based on current account and external debt metrics). Hence a real economy and/or emerging market financial market contagion in our region is highly unlikely. Still, amid uncertainty, market participants are likely to sit on the sidelines until the data confirms there is no need for concern.
As we continue to outline, the greater risk to the region is likely that emanating from China’s domestic banking system as it undergoes lasting change to rein-in shadow banking activity and shift the majority of credit supply to the banks. Chinese credit data is now available to July. In the most recent release, a further fall in shadow banking credit was seen such that credit provided by these shadow lenders has now only increased by about RMB700bn in 2018 compared to almost RMB3.5trn at this time in 2017. Greater lending by the banking system has only offset around RMB900bn of the reduction in new shadow credit in 2018, so total credit growth in 2018 is almost RMB2trn less than the prior year. This outcome is intended and well managed, but whenever a policy shift of this magnitude is undertaken, there are risks which must be monitored. It is not happenstance that Chinese regulators have recently acted to ease financial conditions and bolster market liquidity.
In these uncertain times, a clear positive for China’s economy is their housing market. In stark contrast to the 5.5% gain for total fixed asset investment, real estate investment is running at a 10% year-to-date pace. Further, the recent acceleration in starts implies that the majority of this momentum will be sustained into year end, particularly as continued robust price growth in tier 2 and 3 make for an attractive sales environment.
If gains for this sector are to endure, then both central and local authorities will need to push ahead with their intended long-term reforms to drive growth in industry and incomes across the nation. As we look ahead to next week, US/China trade relations will again fill the headlines, given a Chinese trade delegation is reportedly heading to the US for talks just before the US’ next round of tariffs are to take effect.    
Elliot Clarke is a senior economist at Westpac and can be <a href="https://www.westpac.com.au/news/authors/elliot-clarke/" target="_blank">contacted here.</a>
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Wages and jobs data point to a continued sub-par performance for inflation: Elliot Clarke

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EXPERT OBSERVATION 
Last week the Reserve Bank surprised by lowering its inflation forecasts for 2018 (both underlying and headline).
Headline was lowered from 2.25% to 1.75% and underlying was lowered from 2% to 1.75%.
If correct, that means underlying inflation will have printed below the bottom of the 2-3% target range for three calendar years in a row. Headline inflation will have printed below the bottom of the 2-3% target for five calendar years in a row.
Economists and policy makers generally focus on underlying inflation when assessing the meaning of the “signal” from any inflation print. That is appropriate because the underlying measure “trims out” any large “one off” movements that might be misinterpreted.
However, when assessing inflation over the long term the headline measure is important since it should be a more reliable driver of inflationary expectations.
After all, expectations could be reasonably expected to be influenced by what has actually happened rather than a statistical interpretation of the data.
Inflationary expectations are critical from a theoretical perspective to delivering an inflation outcome. They impact workers’ wage demands and firms’ pricing decisions.
“Inflationary expectations” are like “the natural rate of unemployment” or “the neutral policy interest rate”. They are highly attractive concepts for economists. However they are notoriously difficult to measure.
Consider the “natural rate of unemployment”. For Australia that measure is generally accepted to be 5%. As such it is expected that any unemployment rate below 5% will be associated with rising wage pressures. However evidence from other countries indicates that in this period of accelerating technological development, which is often “job substituting”, natural rates are lower.
We expect that it is highly likely that the natural unemployment rate will also be lower in Australia. But we will not know for sure until we get there. Certainly the Federal Reserve had a view that the rate was around 4.75%. But as the rate fell through 4.75%, wage pressures were missing.
We are not sure what the position of the Reserve Bank is on this issue given that the unemployment forecasts envisage the unemployment rate holding above 5% until near the end of 2020 and yet wage pressures are expected to build through the forecast period.
Policy makers forecasts and market watchers try to measure inflationary expectations. The Reserve Bank uses a range of measures – market economists’ forecasts; unions’s forecasts; inflation swaps; and the 10 year inflation indexed bond. These measures have been gradually falling and are described by the Bank as “generally consistent with the inflation target”.
However, the inflation target has been fixed for twenty years yet the expectations which used to be well above the target are now around the target. One exception is the measure which is widely used by other central banks, including the FED, the 10 year inflation indexed bond. Implied inflation expectations have steadily fallen from 3% to 2% over the last 10 years - well below the 2.5% target.
This comfort that inflationary expectations appear to be settling around the inflation target is the key reason why the Bank resists the periodic calls to lower the target.
The Bank believes that the existence of the target is a dominant driver of inflationary expectations. Consequently, if the target were to be lowered, then expectations would fall and a more disinflationary environment would evolve. This puts considerable weight on the target as a driver of expectations.
But, as discussed, the Bank has been unable to even reach the bottom of the target zone for five calendar years. Furthermore, they have made it quite clear that the next move in rates is up. Reasonably, economic agents could conclude that, even after five years, there is no urgency to reach the target.
We are unable to find a definitive measure of inflationary expectations. However after five years of underperformance of headline inflation below 2%, economic agents would be excused if they expected such conditions to persist.
With the Bank not prepared to use its interest rate “weapon”, and other policies around credit supply actually constraining activity, there must be a risk that, at least from an expectations perspective, low inflation is embedded in the system for longer than the Bank and the market is currently expecting.
In fact, Governor Lowe has often responded to demands to lower the target by claiming that others favour a higher target in order to boost inflationary expectations.
A reasonable query on the purity of the target could be made around the need to monitor financial stability when setting policy. That approach was confirmed by the Governor’s comments in a panel discussion at the Sintra Conference in June.
“To try to get it back to 2.5% very quickly, it would be mainly through people borrowing more money, and having higher asset prices — I think that’s a much bigger risk to our economy than people having surprisingly low inflation expectations.”
Reasonably, we can conclude that after five years of missing the bottom of the target zone, a more aggressive pursuit of the inflation target has been constrained by the need to address Australia’s challenges around financial stability.
The Bank is currently forecasting that despite three years of above trend growth (3.25% in 2018; 3.25% in 2019; and 3% in 2020 against a trend growth rate of 2.75%) inflation (headline and underlying) will only have lifted to 2.25% by 2020.
Perhaps that looks cautious but with inflationary expectations potentially anchored at or below 2%, it might be a tough target to achieve unless the Bank was willing to signal that it was prepared to pursue its target more aggressively.
Bill Evans is the Chief Economist for Westpac.
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