Sticking with almost dog headed determination to the inflation side of the story, I am going to discuss part of the retail trade series for March. All my data comes from free tables from Stats, so you guys can all look at it and yell at me if I make any mistakes 🙂 .
Furthermore, I’m going to stick with the Aggregate supply shock explaination of everything. Why? Well everyone has turned dovish at the sight of lower employment and lower retail sales volumes. Given the distinct possibility that the slowdown is the result of some aggregate supply shocks, the inflation side of the story deserves a run out.
The headline shock for retail sales over the March quarter came from the 1.2% (seasonally adjusted) drop in total retail volumes – in other words the quantity of stuff sold was materially significantly lower over the March quarter than in the December quarter, even taking account of the normal seasonal effects (such as Christmas).
What this headline misses out is that the price of “retail goods” rose by a massive 2.1%? over the quarter (not seasonally adjusted) – implying that there was approximately no-change in the value of spending in retail between March and December.
Now you may raise the point that fuel prices were up 20% on a year earlier in the March quarter (source) – that has to count for something! To account for this we can strip out the automotive sectors and look at a thing called core retail – prices in this sector were up 1.9% over the
Another relevant point is that March is traditionally a high price period (and the data is not seasonally adjusted) – as firms re-evaluate prices after Christmas. However, retail price growth this March was far in excess of other March quarters.
It is also important to remember that Food prices rose – and food is a major component of retail trade. However, at MOST food retailing in its broadest sense (including cafes and bars etc – so the broadest sense possible, get this from looking at retail volumes data, table 6) is 40% of core retailing. Furthermore, the CPI measure of food prices rose 1.8% over the quarter – even less than the lift in March quarter core prices.
Given these factors the lift in prices was significant and maybe it can’t solely be attributed to increases in the relative price of good – implying that strong underlying inflationary under currents are developing in retail.
So whats the deal?
Retail includes imported goods, such as appliances, clothing, and consumer electronics. The high exchange rate and falling costs of production overseas have helped to reduce pressure on household budgets and provide some deflationary impact. If this effect is now being swamped by lifting prices of other retail products the impact on perceived inflation and thereby inflation is concerning.
But demand is obviously slowing – we need to cut interest rates
The value of retail sales was unchanged in March, and the value of core retail sales was up 0.9% (Table 7). As a result, consumers are still laying out the same amount of money in the face of these price rises, they just can’t buy as much at the moment. This (in conjunction with the strong reasonable result for retail in the PPI) indicates that retailers are able to pass on some of the cost increases they are facing – namely the price increases and associated reduction in the quantity of retail products consumed can be taken as the “optimal” response to an Aggregate supply shock.
If demand is waning in the face of falling house prices and tighter credit conditions we will see inflation fall – giving scope for some soothing interest rate cuts. If supply is constrained by temporary (and maybe some permanent) aggregate supply shocks then inflationary pressures will be on the rise and interest rate cuts will only exacerbate the problem without helping the real economy at all.
At the moment we are seeing a mix of both – however my concern is that the supply side of the story is being too heavily discounted.