Inflation up - CPI increases 2.1% over December year to end

ABS released their inflation numbers....CPI increased 0.5% over the month to produce a 2.1% rise over the year. Not a bad result....(Reserve likes to keep inflation between 2-3%) and most of the rise was in the fruit category. The reason for this was environmental...apparently weather condition resulted in some fruits having reduced harvests, thus raising prices. Pure supply and demand dynamics. Still, it is an increase.
So while I did get my prediction wrong, I think these figures are not out of control just yet.

Producer Price Inflation : -1.5% in December

The December '09 figures for the PPI came out today, showing price weakness for third stage Production of -1.5% (a very low figure). Basically this index measures the costs of materials involved in the production of goods and services. -1.5% is the lowest figure on record in 10 years. This can only be good for manufacturers, but no so good for raw material suppliers.

Also bodes well for the inflationary figure, due to be released on Wednesday of next week. As shown by the graph below, the PPI and CPI usually follow the same trend (though the CPI isn't as volatile)

Based on the PPI, I would suggest that inflation will remain constant or decrease slightly. The only danger with this prediction is that the prices of goods and services also take into account wages (or human resource cost). There have been indications in the press that wages might be on the rise again; though the trend increase was only at 0.7% over the September '09 quarter. As Wages make up a large percentage of prices, wage inflation may cause the CPI to increase.

There is also the danger that the strong Australia dollar is camouflaging some price increases. After all, from the stats, domestic prices increased by 0.3% over the year, while import prices decreased 5.2%. This import price deflation is directly proportional to the strength of the Australian dollar.

Regardless of these factors, I do believe that inflation will remain steady or reduce to just under the 1.3% presently recorded.

Car Sales up in December 09 : 3.3% for the month, 17% for the year

Sales of new automobiles have been maintained over a difficult year. Seasonally adjusted, car sales are up by 3.3% over the December month and 17.2% for the year. This growth was mainly in NSW and SA, both of which increased by 22.1% for the year. SUV's (36.7% growth over the year) and "Other Vehicles (38.6% growth over the year) lead the charge

However further investigation of the figures ensure that the growth is mainly coming through SUV's and "Other Vehicles" (which include commercial trucks, vans etc). This can be tied to the government's stimulus 50% tax rebate for plant and vehicles that was implimented to hold up business investment. By contrast, passenger cars have been growing at a much smaller rate over the years (decreased 1.6% in december, increase of 3% over the year). But this is an ongoing trend over the years. Check out the graph below detailing changes in the purchase of automobiles over the last 20 years

Productivity Vs Production

Kevin Rudd, Prime Minister of Australia, recently made a comment saying that Australia's Productivity had to increase to ensure economic growth increased with a gradually aging population. But it appears many of the journalists have misread what productivity is.

Firstly, Productivity is defined economically as GDP per hour worked. So it involves making the most effective use of each labour hour. (i.e increased hours of work or employment doesn't necessarily result in greater productivity...in fact it can lead to the direct reverse). Production is just the growth in GDP.

Australia in recent years has been a bit mixed in it's GDP per hour worked performance. If we graph the GDP and GDP/hour from 1978 to today (using ABS figures) we get the following:-

It seems that getting anything over 1% growth in productivity is quite rare. Has only happened a few times recently; 1981, 1983, 1985, 1991, 1996-1999, 2001 and 2007. In fact Average productivity growth is only 0.4% compared to average GDP growth of 2% over the total period. In many respects, it is more dependent on growth in hours worked (which also averages 0.4% growth over the period). Here is the graph with increase in hours worked added

So to improved productivity, we need to increase the rate of GDP faster than the growth in hours worked. How to do this?

1. Prioritise industries where labour costs are low or non-labour intensive. Can be done through the use of taxation incentives.

2. Innovation of new technology/processes to reduce labour intensive industry i.e Use of robotics/supply chain technology to improve production with same workforce

3. Educate the new/existing workforce through tertiary study/training to improve efficiency across the board.

All these things are achievable. It is good that Australia is at least trying to start the debate on these issues as it will be important in the coming years. More money to the University sector and tax rebates for private sector innovation should be a good first step of this process.

US Inflation rate for Dec '09 : 2.7%

The US Department of Labour released their CPI figures on Friday. The CPI was up 0.1% for December which resulted in a full year Inflation rate of 2.7%. This was up from the previous year 2008-2009 of 0.8%.
Is this a good or bad thing? Well, like most things economic, it is a combination of both. It is good that the CPI is growing. It means that demand for certain goods is starting to increase. 2.7% is not high inflation by any means, so I'm sure the Federal Reserve will keep interest rates low in the short term.
However, if you look at the detail, we find it is mainly the Energy portion of the CPI that has resulted in the increase. Gasoline prices increased by 53% over the year....probably due to the US dollar decreasing over the year. This will improve as the US dollar increases over time. The next highest increase in the CPI was the cost of automobiles, no doubt due to the "Cash for clunkers" Government program. But if this has resulted in an increase in demand for the US car industry, then it can only be a good thing.

Effects of Government's infrastructure spending - Construction Activity Up 2.7% in Sept 09

For those wondering if the Government's infrastructure spending is still continuing, we have these figures from the ABS released yesterday regarding construction activity in September
The value of total construction over the quarter increased by 2.7% (seasonally adjusted). However it was the construction activity for the public sector (or Government) that was the real driver for this growth, up 13.2% for the quarter (or 27.4% for the year). Private sector construction activity actually went down over the quarter by 2.2% (but was still up by 13.6% for the year). So without the Government spending, the construction activity would not be as positive. The Liberals need to find a new subject to attack the government.
Another interesting stat from this release is the fact that NSW Government spends more on construction activity than any other state government. Living in NSW, my question is, what the hell are we getting for our dollars! I presume it's the Federal Government school spending program (part of the GFC stimulus package), but we are outspending the VIC government by almost 10 times. Seems a little high to the goat.
There is a sting in the tail to the overall stats however. The value of work commenced in the September quarter was down 11.8% from the June quarter. This means that the construction stats for the December quarter will not be as promising. Sell Construction/Engineering stocks now! :-)

Unemployment falls again - At 5.5% in Dec 09

Good news for the Australian Economy once again. ABS has reported that the unemployment rate fell to 5.5% in December from 5.6% in November (seasonally adjusted).
Main reasons for this reduction; an increase in part time employment for 27,900 people (taking part time employment to 3.271 million. Full time employment also increased by 7,300 people (full time aggregate employment is now at 7.6 million people).
However it is important to understand what the definition of what is being measured here. The ABS conducts a survey to 0.33% of the population of Australia (over the age of 15) and asks whether the respondent has worked for 1 hour for pay or profit in the last week (or are employed to do so). If so, they are counted as employed. Unemployed people are defined as people 15 years and over who are not employed but have actively searched for work in the past week and could start work in that reference week if required.
Full time work is defined as working over 35 hours, Part time is any employed person working less than that (so includes casuals).
Participation rate (also measured) is the percentage of the working age population (over 15) who are employed or unemployed.
So there are a few issues here. Firstly, those that have dropped out of the labour force for various reasons are not listed in the unemployment stats. However, they can be calculated by looking at the Participation rate. In December, the participation rate has remained pretty consistent. At the moment it is at 65.2%, down from the heights of 65.5% in April 2008, but still higher than the 30 year average of 62.8%. In December the male participation rate climbed 0.1% to 72.2% (long term average, 74.4%) while the female participation rate remained at 58.5% (long term average 51.6%) So it appears that generally, those that are able to work, either are or are looking.
Another thing to consider is the hours worked. One of the interesting things about the GFC was the lack of mass redundancies in Australia when companies started to feel the pinch and profits fell. Due to the flexibility of the industrial relations legislation, employers decided to reduce hours rather than remove workers. So examining the hours worked is also a good indicator of how the employment situation is going. Unfortunately, in December, the number of hours worked decreased from 1536587.4136 thousand hours to 1535554.6371 (Males gained 2000 thousand hours, females lost 3000 thousand hours) resulting in a loss of around 1 million hours in total (a very small change).
So all up, things are looking good in the employment market in Australia. Even youth unemployment (15-19) has reduced from 16.9% to 16.4% and young adult (15-24) has reduced from 11.5% to 11.3% . So not a lot wrong with the employment sector at the moment.