MNI ANALYSIS: Real Disposable Income RBA's New Silver Lining

--RBA Calm On Infla Downgrade As Boosts Household Real Disposable Income

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia may appear calm despite

downgrading its near-term inflation forecast, but supporting their serenity is

optimism that lower inflation due to declining administered prices will provide

a boost to household consumption.

     This is because lower inflation would boost household real disposable

income, especially as price falls are due to temporary factors affecting

administered prices which make up one-fifth of household consumption, providing

little threat to the overall direction of inflation.

     --INFLATION DOWNGRADE DUE TO ADMINISTERED PRICES

     In the August Statement on Monetary Policy, the RBA said it has revised

down the forecasts for headline and underlying inflation for Q3 due to declines

in the prices of some administered services known to have taken place in the

quarter. 

     This includes changes to the child care subsidy package, a decline in

electricity and gas prices in some states, and some smaller changes to TAFE

(vocational educational and training provider) fees and car registration fees in

New South Wales. The RBA admitted there is uncertainty around the size of some

of these price declines, but the central forecast assumes that these price

changes are one-offs and will not affect quarterly inflation in subsequent

quarters.

     The RBA also pointed to a risk of further declines in administered prices

in early 2019 as a number of known government policy changes take effect,

including new subsidies for children's extracurricular activities in New South

Wales, changes to TAFE fees and the removal of caps for child care rebates.

     --MONITORING DISPOSABLE INCOME

     Since taking over as RBA governor in September 2016, Philip Lowe has

clearly communicated that financial stability takes precedence over monetary

policy goals, so long as the labor market remains positive.

     Lowe has therefore resisted pressure to lower the cash rate to get a faster

lift in inflation towards the target mid-point as that would also encourage

additional borrowing by households and, therefore, higher asset prices.

     But with asset prices, mainly housing, no longer rising and wage growth

remaining weak, there is a concern households would cut spending. That would be

a risk for the economy, hurting both growth and employment, and would further

delay progress on inflation.

     Every development that boosts household income is therefore being closely

monitored by the Bank. This also means the RBA sees a silver lining in the

recent downgrade in inflation as it is positive for household disposable income.

     In the August SOMP, the RBA pointed to income tax changes announced in the

2018-19 federal budget as one contributor to household disposable income over

the forecast period.

     --NEW BUZZWORDS

     The RBA also used "real disposable income" in the context of household

consumption for the first time. Other things being equal, real disposable income

goes up when inflation slows. A decline in administered prices is expected to

result in slowing inflation. 

     Inflation could also slow if retail competition fails to dissipate.

     "Lower administered prices may also support real income growth in the near

term, given that administered items make up around one-fifth of household

consumption. Other uncertainties that affect the outlook for inflation, such as

the level of retail competition, also have implications for real disposable

income," the RBA said in the SOMP.

     So while the RBA acknowledges there is downside risk to its inflation

forecast due to administered prices perhaps declining further in 2019, it is

also taking comfort from the fact that it would boost real income. 

     "Other uncertainties that affect the outlook for inflation, such as the

size and persistence of changes in administered prices, also have implications

for real disposable income," the RBA said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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