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10 July 2017

Over the past week Australian shares were down 0.3% with small company shares down 0.2%. In the US share prices were up 0.1%, shares in developed countries were down 0.2%, while emerging market shares fell 0.8%. The Australian dollar increased 1.1% to 76.01 US cents. The 10 year bond yield in Australia leapt a further 0.13% to 2.73%. In the US, the 10 year bond yield rose to 2.39%, up 0.08%. The oil price fell 3.9% to 44.23 US dollars per barrel.

Reported data doesn’t always make sense. Take prices for instance. Annualised inflation, a measure of changes in the cost of goods and services, is at very low levels, currently 2.1% pa. Yet we constantly see headlines regarding the rising costs of many everyday expenses, such as electricity, health insurance and, of course, house prices.

To reconcile this you need to explore what is included and importantly what isn’t included in the official inflation measures. This data is maintained by the Australian Bureau of Statistics and reported as the Consumer Price Index (CPI). The table below summarises the current components of the ‘basket of goods’ in the Australian CPI measures. 

 Group of expenditure Contribution to total CPI basket
 Food and non alcoholic beverages16.8%
Alcohol and tobacco7.1%
Clothing and footwear4.0%
Furnishings, household equipment and services9.1%
Recreation and culture 12.6%
Insurance and financial services5.1%

Electricity, included in the ‘housing’ category, accounts for 2% of the CPI basket, while insurance, including health insurance, comprises 1.4%. These are both relatively small components of the basket.

While rent and new dwelling purchases of owner occupiers, at 6.7% and 8.7% respectively, are included in the CPI basket in the ‘housing’ category, the prices of housing and associated mortgage interest costs aren’t. The reason for this is that rent is an expenditure consumed during the current period of time, but the prices of existing houses and mortgage repayments are not included because they’re viewed as expenditure on an asset over many years.

When we analyse the Australian economy, and the consumer, it’s important to look through headline numbers and consider the real cost of living stresses that people face.

Signing off

Robert Graham-Smith | Senior Investment Analyst 

David Bell | Chief Investment Officer

Past performance isn't necessarily an indicator of future performance.

All data sourced from Bloomberg and Australian Bureau of Statistics.