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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Why is Abbott considering a GST hike?

Sat, 01 Nov 2014

This article first appeared on The Drum on 28 October 2014, at this link: 


Why is Abbott considering a GST hike?

Tony Abbott's recent consideration of GST hikes is more about covering his costly policy priorities than plugging a revenue hole in the budget over the next decade, writes Stephen Koukoulas.

It is not altogether clear why Prime Minister Tony Abbott is giving consideration to hiking the rate of the goods and services tax.

This is especially the case when the budget his Government brought down in May confirmed that government revenue would be rising to a healthy 24.9 per cent of GDP in 2017-18, to be well above the historical average and some 2 to 3 per cent of GDP higher than the revenue take under the previous Labor government.

Increasing the rate of the GST is, at face value, a simple and very effective way to boost government revenue. Based on 2014-15 data, each 1 per cent extra on the GST would raise about $5.4 billion (increasing to $6.4 billion in 2017-18), meaning a hike in the GST rate from the current 10 per cent to, say, 15 per cent would add more than $25 billion per year to government revenue, escalating to more than $30 billion per annum within three years - if nothing else changed.

Hiking tax rates, including for the GST, raises the question, "What is the money being used for?"

One very popular misconception in todays politics is that the Abbott Government is about shrinking the size of government. Overlooked in the discussion of fiscal policy under Mr Abbott are the big spending government programs, including the paid parental leave scheme, roads and other infrastructure expenditure, defence and the staggering $8.8 billion cash grant to the Reserve Bank of Australia.

The revenue base and the desire to hike the GST would not enter into the current political debate if these spending measures either didn't exist or were smaller in scale.

The facts show that Treasurer Hockey's budget in May delivered government payments, as a share of GDP, at 25.3 per cent in 2014-15 and it will remain at or above 24.7 per cent throughout the forward estimates. By way of contrast, the last three Labor budgets had government payments to GDP averaging 24.6 per cent.

If Mr Abbott and Treasurer Hockey were in fact fiscally tight and their budget cut government payments to, say, 24.1 per cent of GDP, the level delivered in the last full year of the Labor government in 2012-13, the current tax take without hiking the GST would see the budget deficit of 0.1 per cent of GDP in 2015-16 and a surplus in 2016-17 and beyond, even with the expensive spending plans of Mr Abbott.

While there is no doubt the revenue base is problematic in the current global climate of low inflation, Mr Abbott's consideration of GST hikes is more about covering the high spending associated with his policy priorities than plugging a revenue hole in the budget over the next decade.

The beauty of the GST is that it is a transparent tax that is well understood and widely accepted by both business and consumers. The downside of the GST is that it is regressive, meaning that those on lower incomes are hit with a larger proportionate share of tax on a given basket of goods and services than is a rich person buying the same basket of items.
This is where much more detail of Mr Abbott's notion of hiking the GST would need to be considered. What other changes will accompany the tax increase? 

Where would the money go? To have any appeal electorally, pensions and other social security payments would need to rise, making no welfare recipient worse off when confronted with grocery and utility bills boosted by the higher rate for the GST. There may be a case for adjusting income taxes lower as the GST increase took effect. But the problem with giving too much of the money back to pensioners and income earners is that overall impact on the budget bottom line and moving to and locking on budget surpluses is undermined if the money is merely recycled through the economy.

Any review of Australia's tax system must include the GST - its level and coverage. This in turn needs to feed into the shape of the budget and issues of fairness and equity. At a time when the Coalition Government is increasing spending at a hefty pace and cannot get the budget to surplus, reverting to tax hikes has an unpleasant whiff of big government about it.

Before any increase in the GST is contemplated, a lot more information needs to emerge on why the extra revenue is needed and perhaps a tighter reign on government spending would deliver a budget surplus without the tax take jumping to new highs.

House prices from hot to warm - cold just around the corner

Fri, 31 Oct 2014

The RPData house price series shows that for the five major cities, prices rose 1.1 per cent in October. At face value, this seems a strong rise, but allowing for seasonal factors it reflects a further cooling from what was runaway house price growth late in 2013 and early in 2014.

Here is some context.

In the seven months since the end of March, house prices have risen a moderate 3.8 per cent in total. This translates to average monthly gains of 0.5 percent for an annualised pace of around 6.25 per cent which, clearly, is nothing to be too worried about. Even the year over year rise reported by RPData has fallen to 9.1%, down from the peak levels around 12 per cent earlier this year. It seems likely, if not certain, that the rate of increase will ease further, especially if – or when- macroprudential rules come into place to dampen the sector.

As noted, the real heat in house prices was in 2013 and the early part of 2014 when, arguably, the RBA could have and should have hiked interest rates. Alas, it didn't take my advise and it failed to do so but thankfully, with the momentum in house prices is now off the boil, it can sit tight a little longer on interest rates and judge what happens globally, to the unemployment rate and inflation before changing.

For now, the RBA can rest easy knowing house prices are no longer rising at a pace that is all that concerning. A macroprudential tweak, if delivered, would likely see house prices soften further or even fall and this is when the RBA can move to cut official interest rates as it deals with disinflation pressures domestically and from around the globe.