Australia | Apr 23 2008
By Greg Peel
To raise or not to raise – that is the question. Whether tis nobler in the mind to suffer the slings and arrows of outrageous inflation, or to take arms against a sea of troubles and by opposing, end them?
Today’s quarterly consumer price index release showed a March quarter headline jump of 1.3% to take the annual rate to 4.2%. Economists were expecting around 1.0%, although they were braced for a higher result following the astonishing 1.9% rise in the producer price index released on Monday. The December quarter rise was 0.9%. It was once again a case of back to the history books, and this level is the highest since the June quarter 2001 or, in a pre-GST setting, 1995.
The Reserve Bank’s two preferred measures, which smooth for seasonal adjustments and can thus be called “core” inflation, gave annualised results of 4.1% on the trimmed mean and 4.4% on the weighted median. This means the RBA will likely claim inflation to be 4.2% or 4.3%. Unlike the US, where the Fed pretends that there’s no such thing as food or petrol and thus the core inflation measure is significantly below the headline, Australia is looking at equivalently extreme inflation on both measures.
The big contributors were an increase in pharmaceuticals (up 13%), electricity (up 6%), petrol (up (5.4%) and rent (up 2.0%). But economists showed once again they never do the shopping, as it was increases across all food groups that made up the difference between consensus and the result. The only big fall was in clothing & footwear (-2.4%), which has “Closing Down Sale” written all over it.
The RBA will now be very uncomfortable. We know that it’s only comfortable when inflation is between 2-3%, and now we’re looking at a number 40% above the pain barrier. One is reminded of a popular Japanese television show. But just because this number is higher than expected, it does not immediately mean a rate rise on May 9 is now more likely.
Indeed, economists had earlier suggested anything above a 1.3% rise might tip the balance. So here we are. The rhetoric streaming from the RBA of late has more than hinted that higher inflation is expected in the March quarter, but given signs the economy is slowing such a number is quite probably the peak. Westpac believes the clothing & footwear figure is important. It is confirmation of a slowing in consumer demand beyond staples. If we can hang on at the supermarket and the pump then consumer discretionary items should just fall in price and bring the number down from here on. They’ll have to – as the RBA is charged with bringing inflation back below 3% and is now starting at 4.2% and not 4.0% as hoped.
(Just don’t anyone mention oil at US$120/bbl last night).
There will likely be a change in RBA rhetoric however, to a stance that is not quite so definitively “on hold” as the previous statements. Another factor for the RBA to consider is the additional lending rate rises from the banks, and the possibility there will be more. Libor – the rate upon which all global bank funds are based, is on the rise again. The credit crunch is far from over.
The RBA may not have to raise rates. But for mortgage holders the comfort could well be short-lived anyway, if the banks respond. Analysts suggest the big banks are yet to fully incorporate funding increases.
Nevertheless, there are some economists who still believe we’ll see 7.5% in May, or at least soon. CBA Economics has held this belief for a while and today’s result leans the odds in their favour.