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.

comments powered by Disqus

THE LATEST FROM THE KOUK

RBA policy errors highlighted by Governor Stevens

Wed, 19 Nov 2014

There is a huge bucket of irony in RBA Governor Glenn Stevens speech to CEDA last night.

For someone who has passively sat by with the exchange rate ridiculously overvalued for several years and who has been reluctant to use monetary policy to manage the business cycle and the interest rate sensitive parts within, Mr Stevens calls for economic agents to "most of all, [show] a willingness to take the occasional risk" are a touch disingenuous.

Stevens questions "whether our overall business environment is conducive enough to risk-taking and innovation".

Look in the mirror Glenn!

It has been pretty obvious for the last couple of years that the Australian dollar has been over-valued, by a large amount, and this market misalignment is one reason why real GDP has been below trend over that time and as a result, the unemployment has risen to a decade high of 6.2 per cent.

Markets yawn at the G20 plans for faster growth

Mon, 17 Nov 2014

Financial markets are digesting the news from the G20 meeting, the centerpiece being the pledge to grow the global economy by 2.1 per cent more over the next 5 years.

Now everyone knows that financial markets give the best and most telling instant assessment of events – be they the horrors of September 11, a shock data release, a policy change, a geopolitical development or some other news that is likely to change the course of economic events and with that, financial market prices.

The initial reaction to the G20 meeting is, well, underwhelming.

Market think, quite frankly, that the G20 pledge for faster growth is not worth the paper it's written on, that it is lame, contains nothing new and who needs the G20 to tell governments that stronger growth is good, especially in the context of the hangover from the Great Recession.