In the groove inflation rate means RBA on hold

Wed, 23 Jul 2014  |  

It seems the markets and a gaggle of commentators are getting a little excited about the June quarter CPI which showed headline inflation at 3.0 per cent annual terms and the underlying inflation measure at 2.8 per cent. At face vale, both are near or at the top of the RBA 2 to 3 per cent target band and without any further analysis would suggest there is something of an inflation issue in the economy.

But when one bothers to dig into the numbers, it is clear that inflation is probably slowing and one-offs have been pushing those annual figures higher.

In six monthly annualised terms, the path for underlying inflation over the past two years has been:

H1 2014: 2.5%
H2 2013: 3.1%
H1 2013: 2.1%
H2 2012: 2.7%

There was a bit of a lift in the second half of 2013, which now appears to be a quirk, perhaps influenced by the AUD dipping through much of 2013 and adding to some import prices. Obviously that mini-spike will drop out over the next two quarters which suggests a gentle pull-back in the annual inflation rate is likely by year end.

The August RBA Board meeting is likely to rest easy on the inflation front, comfortable in the knowledge that underlying inflation remains around the mid-point of its target, plus or minus a tenth or two.

This means that interest rates will be on hold a little longer. It could well be the case that with inflation a neutral issue, other key indicators will determine when and which direction rates next move.

This is where the next few labour force releases are so critical. It would be hard to see the RBA remaining on hold if the unemployment rate rose to 6.25 per cent and wages growth remained anchored below 3 per cent in the near term.

The Australian dollar remains an issue for the RBA, especially with the resumption of the commodity price fall that is linked to a good but not great picture for the world economy. Not that a rate cut would drive the dollar lower, but it would help guard against the damage it is doing to the economy.

The fly in the jam jar is house prices. They still seem to be chugging along at a solid double digit growth pace and any move to cut interest rates may underpin a move towards a particularly uncomfortable rate of house price appreciation. Maybe non-monetary policy policies need to be considered to address this increasingly uncomfortable lift in house prices.

All of which comes back to the good news on inflation – it is not a concern in either direction at the moment. With the Australian dollar still high, wages growth still low, it is likely to remain a neutral issue for the remainder of 2014.

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The Small Government Myth

Tue, 02 Feb 2016

This article first appeared on The Adelaide Review website at this address: 


The Small Government Myth

There is a common perception that the Liberal and National Coalition parties have an ethos of small government. That is, they pursue policies that encompass low levels of government spending and low taxation versus big spending and high tax from the Labor Party. 

That is the perception.

Treasurer Scott Morrison has provided facts that prove otherwise. In December, with the release of the Mid-Year Economic and Fiscal Outlook, Morrison confirmed that the Coalition is high taxing and big spending and that, for many decades, Labor has been the side of politics that delivers small government.

The MYEFO documents show that government spending was 25.6 percent of GDP during the first two years of the current Coalition Government and it will remain above 25.3 percent of GDP out to 2018-19. The Rudd/Gillard Government delivered only one budget that saw the government spending to GDP ratio above 25.1 per cent and that was in 2009-10 during the height of the global depression risks – where a raft of temporary stimulus measures saw spending hit 26 percent. In every other year of the Labor administration, government spending was below 25 percent of GDP.

The key to Australia's economic success: locking in low inflation

Tue, 02 Feb 2016

This article first appeared on The Guardian website at this address: 


The key to Australia's economic success: locking in low inflation

When Paul Keating “snapped the inflation stick” in the early 1990s, he delivered one of the most valuable, potent and lasting reforms to the Australian economy. Sustained low inflation with a specific target was, in many ways, as important as the decision to float the Australian dollar.

Decades on from this economic fracture, Australia has one of the highest standards of living in the world and has not had a recession in a generation. Last week’s December quarter consumer price index confirmed annual inflation running at just 1.7%, meaning that, over the past 25 years, inflation has averaged 2.5%, which is in stark contrast with the 1970s and 1980s, when annual inflation averaged a destructive 9.2 per cent.

Low inflation is important for many reasons but the boost to living standards for low and middle-income earners is among the strongest. When an economy can lock in low inflation over an extended time frame, as Australia has, it means that those who receive even modest increases in wages and pensions have the purchasing power of their incomes at least maintained, if not improved.