Ahead of tomorrow’s RBA meeting, a flow of local data locks in generally good news on the economy and a still troublesome rate of inflation.
According to the TD-MI monthly inflation gauge, prices rose 0.4 per cent in April, after increasing 0.2 per cent in March. The annual increase rose to 2.8 per cent and remains dangerously close to the top end of the RBA’s 2 to 3 per cent target band, especially with monetary policy so loose and the wealth effect from rising house and share prices still very powerful.
The number of building approval was a touch weaker, falling 3.5 per cent in March, after a 5.4 per cent fall in February, but were still 20 per cent higher than a year earlier. While slightly softer, it appears that the housing construction boom remains in place with 2014 likely to see a record number of new dwellings constructed. This vital aspect of the rebalancing of economic growth away from mining investment towards construction appears to be locked in.
In a vital sign for the health of the jobs market, the number of job advertisements, as measured by the ANZ series, rose 2.2 per cent in April and in trend terms, has been rising for six straight months, This bodes well for strong job creation in the months ahead and indicates that the unemployment rate should continue to fall over the near term at least.
While not the best indicator as a predictor of growth, the Performance of Services Index fell 0.3 points to 48.6 points to be close to its long run average but below the level consistent with robust activity.
There is no doubt the US economy is into a healthy upswing, confirmed with the blockbuster jobs report on Friday. While the labour market data can be tortured to scream “I’m not as strong as the headlines suggest”, it seems the raft of recent news is now consistent with the US growing at about 3 per cent. In anyone’s language, this is good news.
So to the RBA tomorrow. It looks like I will be buying my mate Rory Robertson lunch – the RBA will not be hiking interest rates, despite the strong economic news and bubbling inflation pressures, confirmed not only on the TD-Inflation Gauge today, but also the recent official CPI which showed an acceleration in inflation.
House prices, 5 days into May, are up 0.3 per cent for the month and the annual growth rate remains well above 10 per cent. This is neither good nor sustainable.
The RBA, it seems, are willing to play chicken with inflation, waiting for it to accelerate further before acting and in the interim, leaving the cash rate at a super stimulatory 2.5 per cent. Perhaps the RBA thinks that the fiscal tightening to be unveiled next week will see economy growth slip back below trend later in 2014. It is not clear.
All of which means the RBA will likely be on hold a few months yet, even though it should have already started down the path to normalising interest rates because growth is above trend and inflation risks are tilted squarely to the high side.