On Tuesday, in a rather dull and tone-deaf speech, new Reserve Bank Governor Michele Bullock observed that the sun rises in the east.
Keyboards rattled in every newsroom and economists’ quills scratched feverishly in the rush to inform the nation that: “RBA WARNS SUN RISES IN EAST!”
This was followed by fulsome analysis concluding that the RBA had confirmed its bias towards morning light originating in the eastern sky.
We await in trepidation the reaction to Ms Bullock’s opinion regarding the Pope’s religion and bears’ bowel movements.
Yes, I am taking a little liberty with the Governor’s words. The speech, apparently written by committee, didn’t contain anything as pithy as “the sun rises in the east”.
Instead, Ms Bullock actually said the bank “will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation”.
This is not news. It isn’t even “dog bites man” – it’s barely “dog barks at cat”.
It’s merely stating the bleeding obvious.
It would only be news if the Governor said the bank would hesitate to lift rates if it thought inflation was about to take off. Otherwise, it’s just the RBA saying what the RBA always says.
Nonetheless, that helped set the tone for the commentariat when Wednesday’s June quarter CPI rise printed at 1.2 per cent – a whole 0.1 higher than economists where predicting.
Big banks are of one mind
All four big banks have decided the RBA needs to increase its cash rate again on Melbourne Cup day in keeping with its perceived tightening bias.
Generally overlooked was the very next sentence in Ms Bullock’s speech:
“At the same time, the Board is mindful that growth in demand and the rate of inflation have been moderating, and that there are long lags in the transmission of monetary policy.”
If you are in the business of analysing Governors’ speeches syllable by syllable and you combine that qualification with the headline-making sentence before it, the news value drops from “dog barks at cat” to “some dogs have fleas”. There would be no simple story to tell.
With the tone already set, the majority analysis rolled on into the CPI figures, generally concentrating on the fact that the September quarter had not followed the trend of the two previous quarters in being lower than its predecessor – even though the bank economists’ collective had not expected it to.
Now here’s a thing about major statistical series: their trend is rarely entirely smooth – there tends to be dips and bumps along the way.
Never minding that the tribe pushing the November rate hike tortured the data to concentrate on the areas of strongest price rises.
For example, Westpac’s new chief economist, Luci Ellis, freshly converted from the RBA, reportedly said the “underlying detail was sobering”.
“Ellis pointed out that besides fuel inflation, there were strong inflation increases in vehicle prices, home building costs and a range of services including meals out, dental fees and transport costs.”
Here’s a thing about the quarterly CPI releases: they tell you what inflation was, not necessarily what it will be, the “outlook” that Ms Bullock says will call the tune.
The components can provide hints about what’s happening, but nothing very certain – otherwise all those economists and the RBA wouldn’t keep getting their forecasts wrong.
And here’s yet another thing about those headline-making components: many of them are not influenced by the RBA moving rates and some of them actually do the RBA’s tightening job for it in dampening the economy.
The Centre for Future Work’s Greg Jericho provided some blessed perspective in The Guardian, pointing out that the annual rate of inflation is continuing to fall nicely and that it is non-discretionary items – demand for which and the price of barely feel interest rate rises – that are keeping inflation up.
Indeed, non-discretionary items inflation at 1.4 per cent for the quarter was double the meek inflation rate of discretionary items at 0.7 per cent.
Pain at the pump
“The RBA raises rates because it increases the cost of repaying mortgages. This means people with home loans have less money to spend on other things and thus slows the economy,” Mr Jericho explained.
“But, as the Treasury secretary, Steven Kennedy, pointed out in his appearance before the economics committee at Senate estimates, higher prices of necessities such as petrol has the same effect. You can’t avoid paying electricity bills or rent or petrol (at least in the short-term) and so, just as with higher interest rates, that means you have less money to spend on other things.”
(I’d add that screwing down the economy through higher fuel prices also is more equitable than making the third of us with mortgages take most of the pain for the team. It works a little like having a flexible GST – a fairer way to take money out of pockets than blunt old monetary policy.)
As Mr Jericho concluded people are already getting hit by higher costs of essentials reducing their ability to save and spend money on non-essential goods and services. Another rate rise would just hurt low-to-middle income earners for no good reason.
As to the “outlook”, soaring rents were a major contributor to the September CPI increase and we know rents will continue to damagingly rise. Rent inflation will only be tamed by building much more housing – something that increasing interest rates would make harder.
Building materials costs were another major factor as there is still a very hefty amount of construction being completed, but a Governor concentrating on the outlook would be mindful that housing approvals have fallen dramatically – there’s a building slump rapidly approaching and the peak of infrastructure construction also has been downgraded.
What’s more, the headline annual rate of inflation – the thing that provides the RBA’s target range – is pretty much guaranteed to fall again next quarter for the same reason why it fell in the last quarter: a much bigger rise a year ago falls out of the numbers.
Even if the December quarter rise also is 1.2 per cent (it will probably be less), the annual rate will dip to 4.6 per cent.
But wait: Friday provided a jump in the quarterly Producer Price Index, which had the monetary hawks such as economist Warren Hogan sharpening their talons:
The Australian Bureau of Statistics itself provided perspective in the release:
“Higher prices for construction outputs, (that again) petroleum (that again) and energy (that again) were compounded by broad-based price increases in services, particularly health and child care services. New financial year contract negotiations, indexation clauses, annual wage cost reviews and increasing operating costs contributed to price rises across services industries.” (My parenthesis.)
So there was a strong seasonal influence. You know when the biggest PPI quarterly rise was for this cycle? September last year, followed by three quite low quarters.
I don’t remember the hawks calling for rate cuts when the PPI was just 0.5 per cent in the June quarter.
So if Ms Bullock and her board don’t pay attention to the commentariat, concentrate on the outlook, not the past, and discount the impact of the non-discretionary factors that are actually reducing demand, they don’t need to lift rates again on Melbourne Cup day.
And it will be a happier race for everyone.
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