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Australia May Retail Sales Rise on High Food Prices

Australian retail sales rose well past expectations in May, pointing to consumer resilience in the face of higher living costs and challenging the official view that interest rates were high
enough to curb domestic demand.

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The Australian dollar firmed as investors wondered if a further rate hike might be needed after all, though most analysts played down the result as a bounce after months of weakness with much of the increase also due to surging food prices.

"This is a misleading signal and the true state of consumption is a lot softer," said Brian Redican, a senior economist at Macquarie. "It doesn't change the state of play on monetary policy, with rates firmly on hold."

The Reserve Bank of Australia (RBA) left rates unchanged at 7.25 percent at its monthly policy meeting on Tuesday citing growing evidence that past hikes were cooling demand.

Wednesday's report from the government showed retail sales rose 0.7 percent in May to A$20.24 billion ($19.3 billion), the biggest gain in six months and above forecasts of a 0.2 percent increase.

However, food accounted for over half the rise and, while potentially positive for retailers like Woolworths, reflected higher prices rather than increased demand.

Spending on discretionary goods was more sudbued with sales of household goods down 1.0 percent in May, department store sales off 0.8 percent and clothing 0.3 percent.

The pain was illustrated by a profit warning from clothing retailer Just Group, which on Wednesday complained of slower trading and industry-wide uncertainty.

The direction of retail sales matters a lot to the economy given they account for around 23 percent of Australia's annual economic output and the sector is the biggest single employer with about 15 percent of all jobs.

"Retail sales have been one of the key signs the RBA points to about the slowing economy," noted Michael Blythe, chief economist at Commonwealth Bank.

"Whether May is just a blip on the way down remains to be seen, but it certainly suggests some of the downside pessimism that was building about the economy is a bit overdone."

Fewer Jobs, Not Enough Homes

Other data out on Wednesday were less ambiguous in their weakness.

Vacancies for skilled jobs dropped 3.7 percent in June, to be 8.2 percent down on the same month last year. That could point to a further slowdown in employment, which suffered its first fall in 19 months in May.

Approvals to build new homes sank by 6.5 percent in May, reversing all of April's surprise 5.4 percent increase and taking permits to their lowest in 28 months.

"With population growing at the fastest rate in 18 years, we simply should be building more homes, not less," said Craig James, chief equities economist at Commsec. "But interest rate hikes have spooked investors and budding owner-occupiers."

Unlike the United States, where there is a massive overhang of unsold homes, Australia has a running shortage of suitable housing. Record levels of immigration is driving demand, but rising building costs and much tighter credit conditions means supply is failing to keep up.

The Housing Industry Association estimates an additional 40,000 new homes need to be built every year to match demand.

That supply shortfall is pushing rents sharply higher and, as rent accounts for a chunk of the consumer price index, feeding inflation. In the year to March rents were up 7.1 percent, well above the inflation rate which itself was as high at 4.2 percent.