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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Punitive approach to restraining welfare costs lazy and short-sighted

Fri, 20 Nov 2015

This article first appeared at The Guardian at this link: 


Punitive approach to restraining welfare costs lazy and short-sighted

The discussion being driven by the Turnbull government that there are ‘too many people on welfare’ has as its driver a framework to make it harder for people to get such payments. It is about eligibility for the payments that is dominating the government’s plans for who will be on welfare in the years ahead.

According to Christian Porter, social services minister, annual government expenditure on welfare is estimated to rise from $157bn to $277bn in a decade. The vast bulk of these payments will go to aged pensioners, the unemployed and the disabled. When looking at this increase, Porter says there is a serious issue of how we pay for it and how we make the welfare system sustainable.

Porter’s approach is squarely on making it harder for people to get “generous” welfare payments. In his sights is a tightening of the tests for the unemployed to receive the Newstart allowance and for those unable to work to receive the disability support pension.

Let’s be honest here. This is lazy policy and looks at using punitive measures rather than limiting the supply of people who will need welfare support in the years ahead. Rather than tackling the welfare “time bomb” this way, it is possible to lower spending on welfare by encouraging economic growth, productivity and decency. What about reducing unemployment, encouraging more self-funded retirement and helping those with a disability through a mix of employment opportunities and preventative health care?

What is missing from our economic commentary?

Thu, 19 Nov 2015

This article first appeared on Yahoo7 Finance at this link: 


What is missing from our economic commentary?

If you listen too much to the financial news at the moment you would be very worried about Australia’s economic future. This is because so much of the focus is on the collapse in commodity prices.

The price of iron ore, coal, copper, gold and most other commodities are at or near six, seven or eight year lows. What is missing in much of the commentary on the economy, and something that is almost always overlooked, is the simple fact that commodity prices are still well above the levels prevailing from 1992 to 2004, a time of strong economic expansion.

In many cases, today’s low commodity prices are still double, triple or even quadruple late 1990s levels. The 12 year stretch of a strong economic growth up to 2004 was clearly supported by factors other than stratospheric commodity prices and a mining investment frenzy.

Looking back at that period of economic history saw consumer spending, generally buoyant construction activity and the early stages of a surge in services – finance, education, health and tourism – support the economy. Fast forward to today and despite lower commodity prices, it is clear that the economy is still growing, a reasonable amount of jobs are being created and those factors are occurring with low inflation and very low interest rates.