ABS: CPI tweak to keep interest rates on hold

ABS: CPI tweak to keep interest rates on hold

10 November 2017

Changes to the way the Australian Bureau of Statistics calculates the consumer price index will significantly lower Australia’s inflation rate and likely keep interest rates on hold until the end of 2019, reports The Sydney Morning Herald.

ABS Chief Economist Bruce Hockman said the bureau will pay more attention to the weight it gives the cost of rent and utilities and less attention to food and non-alcoholic beverages in the new index schedule to start from December.

CPI expenditure weights reflect household spending on goods and services and are calculated using information from a range of ABS surveys, in particular the Household Expenditure Survey.

“The 17th series CPI weights show metropolitan households continue to spend the greatest proportion of their expenditure on Housing (22.7 per cent), followed by Food and non-alcoholic beverages (16.1 per cent) and Recreation and culture (12.7 per cent),” he said.

Over the past six years, Australia’s capital cities have seen an increase in the proportion of renters; this combined with rental price growth is increasing household expenditure on rents.

Utilities expenditure has also increased, with households spending more on electricity, gas and water and sewerage charges.

“While food and non-alcoholic beverages remain a large component of household expenditure, the proportion spent on food and non-alcoholic beverages has fallen compared to 2011,” said Mr Hockman.

The first update in six years is driven by the need for the index to more accurately reflect how Australians are spending their money.

“This may sound like a technical change that only economists are going to get a kick out of, but it could significantly influence what happens to interest rates and the financial markets,” said Capital Economics chief economist Paul Dales.

“The new consumer price index spending weights suggest that inflation will be 0.2 percentage points lower than otherwise over the next two years and therefore support our view that underlying inflation will stay below the 2-3 per cent target rate until 2020.”

This would make it even harder for the RBA to raise interest rates before late in 2019, said Mr Dales.