CPI Challenges RBA

The Australian CPI data released today did not show as much improvement as the market had hoped for.

The headline number for the year dropped from 7.8% to 7.0%, and this is a significant improvement nonetheless. Hence, again hopes were raised that the RBA has finished hiking rates and this resulted in equity market strength. While the Australian dollar softened.

Australian price pressures remain alarming. Source: Australian Bureau Statistics.

There are two important takeaways from today’s data.

While many are celebrating the headline decline, they are missing the real shift taking place here. That is, that goods inflation is very quickly being replaced with services sector inflation. In fact, Services Inflation actually went up to 6.1%. This is an extremely worrying sign as we have seen similar patterns emerge elsewhere in the world and they are indeed foreboding.

The second important thing to point out, is that some of the  the biggest increases occurred in areas it is not easy for Australian families to avoid. Medicine, education, housing, all had huge price advances.

Energy prices were out of control. Electricity and Gas prices were ridiculous at a 26.2% increase. This when Australia is a major global producer and exporter. Questions will continue to ice asked as to why Australian families are funding global exports?

When it comes to the Reserve Bank however, still reeling from the Independent Review findings just handed down, the challenge is that Services inflation is taking over. And just as global energy prices could be about to go higher again?

If you are fighting runaway inflation as your core objective, today’s data will have the RBA shaking in its boots. That they made a major mistake in pausing its rate hike cycle last meeting. On the basis of today’s data, the RBA is likely to resume hiking rates at its next meeting.

The great challenge however, is the fact that energy, medical, and housing costs remain extreme and continue to build. This means Australian families are being heavily impacted by these costs in a way they cannot escape. Is it really correct monetary policy to add significantly to their current burdens by adding additional interest weight to their mortgages and investment borrowings.

The likely outcome of such policy will inevitably lead to a moment where the straw breaks the camels back. Without warning, without the ability to adjust in real time, households will suddenly shudder to a halt in their consumption activities.

This is likely to happen to a large swathe of Australian households at the same time. This is already happening for some, and now we could well be approaching a tipping point where the economy suddenly stops in its tracks and recession takes hold instantly.

So there is the challenge for what is after all an out-going Governor and Board. Do they simplistically fight inflation as if it is demand driven with ever higher rate settings? Something I always cautioned against. Yet, it has clearly been the intellectual basis of their rate hikes to data.

Alternatively, do they take the risk that these prices alone are so extreme that they will themselves deliver self-corrective behaviour to the economy. We are already seeing some price cutting for consumer items like furniture.

Does the RBA really need to apply antiquated ideas and techniques, or can it move into this very specific distinct situation and simply now stand on the sidelines and weather the storm. Perhaps the actual appropriate response.

Because all along, the big question everyone failed to ask, is whether rate hikes in response to this new style of inflation actually worked, or did they just add to the burden and misery of Australian working households?

Previously, I would have said the RBA will now hike at its next meeting. Let there be no mistake, these numbers were scary on the inflation front.

Post the RBA Review and findings however, it is possible they may have lost their confidence a little in regard to their previous hawkish behaviour.

Do they listen to the data alone, then they hike, or, do they tread carefully given the pain the Australian economy is already in and that they are now more open to critique than ever before.

At last.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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