Another RBA fail as underlying inflation drops to 1.7 per cent

Thu, 01 Nov 2018  |  

The September quarter CPI confirmed annual underlying inflation easing back to 1.7 per cent, well away from the mid-point of the 2 to 3 per cent target range.

The result locked in fours years where inflation has been below the mid point of the range and two years where it has come in below the bottom of the target band.

For the RBA, this is a fail.

A fail not because of a temporary miss. The odd miss on inflation is inevitable and is fine. Shocks sometimes come along and there are periods where inflation spikes or drop temporarily.

But this is no temporary miss.

Doing nothing about two years of missing the target and then having a forecast profile that suggests there will be another couple of years where inflation remains below the mid-point of the target is a policy elitism that damages growth, employment and wages.

Sustained below target inflation is a deliberate policy outcome that has resulted from the RBA keeping interest rates too high for too long.

The RBA Governor has acknowledged this in a round about way, with a willingness to accept low inflation for the purpose of achieving financial stability, which curiously remains undefined, or at least is a moving target.

Had the RBA cut interest rates to around 0.5 per cent a few years ago, as the other credible central banks around the world did, Australia’s inflation rate would no doubt be in the band and picking up, the unemployment rate would be lower and wages would be accelerating.

Alas for Australia, the unemployment only last month dropped below 5.25% for the first time in 6 years while the unemployment rate in countries with pragmatic and consistent central banks such as the US, UK and Canada have seen unemployment rates drop to multi-decade or record lows and there are signs of a clear pick up in wages.

Let’s hope the RBA comes to its senses before too long and has a policy framework that sees it embrace its inflation target.

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