Today’s retail sales and building approvals figures for May confirm that an already sluggish economy continues to slow, although the retail sales figures seemed to perk up in the month, rising by a strong 0.7% in seasonally adjusted terms, according to the Australian Bureau of Statistics.

Building approvals weakened again: April’s surge in non dwelling approvals disappeared and total approvals dropped a steep 6.5% to be up just 0.2% on May of last year. House approvals fell 1.2% in the month and other dwellings (flats and home units) dropped 18.2% in May from April, which was up a revised 5.4% from March. That’s why the Housing Industry Association reported a 5.3% drop in new home sales in May

The rise in retail sales was driven by food retailing up 1%, other retailing up 3.1%, and recreational retailing up 2.2%. Department stores and household goods stores saw weaker sales. Petrol sales are only indirectly covered through some convenience store sales, but not sales through outlets controlled by the likes of Woolworths and Coles. Although the increase in retail sales is likely to be revised in coming months, it was first sharp rise in activity in the sector this year.

The RBA won’t like the increase. If it shows up in sales figures for June and July it will have a serious think about a rate rise, even though it doesn’t want to increase rates again. It has become very concerned about the impact surging oil and petrol prices are having on activity and on the economy generally.

The trend in retail sales growth is still all but flat and so long as that continues, the RBA will be content to watch as monitors the growing impact of high oil prices and their influence on inflation. As it said yesterday: “Inflation is likely to remain relatively high in the short term, and the consumer price index will be further boosted in coming quarters by the recent rises in global oil prices.” Not other cost increases, such as rising food, steel or car prices: just oil and its products. And so long as oil prices continue to rise, the RBA sees inflation remaining a problem and interest rates won’t be eased.

Oil is now the driver of inflation the world over. In Japan it has helped boosted headline inflation to a high 1.5% a year (although prices are still falling when oil and food prices are stripped out); in South Korea it has pushed annual inflation up to 5.5% with the biggest monthly rise in May in 10 years; in Thailand it’s close to 8%; in the eurozone it’s 4% and in the US and Australia it’s 4.2%.

The RBA now expects inflation to rise above their current levels of 4.2%. Without giving any forecasts but looking at the surge in oil prices through the quarter (up some 38%) to the end of June, we could easily see headline and core inflation of 4.8% or more when the CPI is released later in the month. Though inflation will rise in coming quarters, the bank has all but ruled out another rate rise; it believes the economy is slowing and employment growth is easing.

The bank in fact singled out “fuel costs” as acting as a restraint on activity: “The evidence is that the tightening in financial conditions, in conjunction with other factors including rising fuel costs, is working to restrain demand. Indicators of household spending have recorded subdued outcomes over recent months, and credit expansion to both households and businesses has weakened significantly.”

It sees rising oil prices as an inflationary danger, but also wants to use their dampening effect on demand slow the economy. If it hadn’t been for the surging resource sector, and the capacity constraints that emerged last year, you could argue that the Reserve Bank might now be wondering if a rate cut might be in order to help ease the pain of high oil prices.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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