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 Coalition might as well face it they're addicted to tax

Thu, 21 May 2015

It is about as credible as believing the earth is flat, but there remains a common perception that the Labor Party is high taxing, while the Coalition is low taxing.

Mr Hockey’s budget last week smashed once and for all this perception with the simple fact that his own budget documents show how much Coalition governments rely high tax to pay for their pet projects.

As a share of GDP, Mr Hockeys budget documents show that the level of tax to GDP takes the following profile:

2014-15   21.9%
2015-16   22.3%
2016-17   22.7%
2017-18   23.0%
2018-19   23.4%

And even with that surge in tax revenue, the budget is still in deficit. Whoops.

Quiz Week 4: Win a copy of my book, Myth Busting Economics

Sun, 17 May 2015

It is week 4 of the quiz to win a copy of my book, Myth Busting Economics.

The first three quizzes have gone well. Two of the winners have been HSC economics students which is hugely impressive about their thought processes and teachers.

Now to week 4. All entries need to be emailed to This email address is being protected from spambots. You need JavaScript enabled to view it.  before 12 noon on Wednesday, 20 May 2015. So please enter soon and I look foward to giving away another copy of my book.

Here is this week’s question.

According to the 2015-16 budget papers, what is the amount of government revenue (called receipts in Budget Statement number 10) Treasurer Joe Hockey is forecasting to collect in 2015-16? Answer to the nearest $million – ie $354,305 million.

Tie breaker 1:

In the budget papers, what is the economic forecast for real GDP growth in 2015-16?

Tie breaker 2:

What is the date of the next RBA Board meeting?

Tie breaker 3:

What will be the yield on the Australian 10 year government bond at close of business, Friday 22 May 2015. Note the current yield is 2.89 per cent.

So there it is. Get your entries in by the Wednesday deadline. All the best.