Inflation is slowly deflating and the RBA should be worried

Wed, 22 Oct 2014  |  

Australia's inflation rate is heading lower. What is interesting is the deceleration in inflation is starting from a position where inflation was within the RBA's target band of 2 to 3 per cent.

In the September quarter, the CPI rose by 0.5 per cent, to be up 2.3 per cent for the year. Taking out the large prices swings and using the RBA underlying measures, inflation was 0.5 per cent for the quarter for an annual rise of just 2.5 per cent. In the first half of 2014, headline inflation was near 3 per cent with underlying inflation around 2.75 per cent.

Inflation is well contained, which ever way you cut it. Indeed, it looks like the quarterly momentum on prices is slowing which will filter into the year on year inflation run rate over the next few quarters. If, for example, underlying inflation is 0.6 per cent in the December quarter, annual underlying inflation, all of a sudden, is down at 2.25 per cent.

What is interesting is to use the latest inflation data to recast inflation forecasts into 2015 and 2016. With the unemployment rate on the rise, with wages growth falling to levels not seen since before the Whitlam government was in power, it is easy to frame a forecast scenario where inflation will be lower over the next 18 months, rather than higher.

Throw into that mix the free fall in the terms of trade, deflationary pressures from Europe, sharp falls in inflation in China and the world more generally, and the scenario for the RBA missing its inflation target on the down side loom large. This time next year, underlying inflation could be testing record lows around 1.75 per cent.

Which is why the RBA needs to be cutting interest rates. While its rhetoric and constant briefing of market economists has them all singing from the same song sheet, the next move in interest rates is up, another few months of soggy local economic data, a further uptick in unemployment, downtick in wages growth and further confirmation that inflation is falling, should see it change its mind early in 2015. That's when the next interest rate move – down – it likely to occur.

comments powered by Disqus

THE LATEST FROM THE KOUK

The RBA admits it stuffed things up – sort of

Mon, 22 Jul 2019

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/did-the-rb-as-monetary-policy-put-our-economy-at-risk-033940907.html

---------------------------------------------

The RBA admits it stuffed things up – sort of

The Reserve Bank of Australia needs to be congratulated for publishing research which implicitly confirms that it made a mistake when setting monetary policy in the period mid-2017 to early 2019.

Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.

The costs to the economy includes lower GDP growth and higher unemployment, that lasts for at least for several years.

A few terms first.

According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.

In the context of the period since 2017 and despite the RBA consistently undershooting its inflation target and with labour underutilisation significantly above the level consistent with full employment, the RBA steadfastly refused to ease monetary policy (cut official interest rates) because it considered higher interest rate settings were appropriate to “lean against” house price growth and elevated levels of household debt.

The weak economy is turning higher

Mon, 15 Jul 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/just-how-weak-australia-strong-economy-213520159.html 

----------------------------------------------

The weak economy is turning higher

In the space of a couple of months, the rhetoric on the economy has gone from strong to weak.

Curiously, both assessments are wrong.

The economy was actually weak during the first half of 2019 and, if the leading indicators are correct, late 2019 and 2020 should see a decent pick up in economic activity.

It is not clear what has caused this error of judgment and the about face from so many commentators and economists, including importantly the Reserve Bank. A level-headed, unbiased look at economic data confirms that in late 2018 and the first half of 2019, the economy was in trouble. There were three straight quarters of falling GDP per capita, house prices were diving at an alarming rate, there was a rise in unemployment, wages growth remained tepid and low inflation persisted.

These are not the dynamics of a “strong” economy.

Only now, in the rear view mirror look at the economy, are these poor indicators gaining favour, leading to generalised economic gloom.