Hedge Clippings | 27 October 2023
Australia's latest inflation data was released on Wednesday, triggering forecasts from three of the big four banks, and a multitude of other economists, for a Melbourne Cup rate rise. Depending on one's point of view, the numbers themselves weren't completely convincing:
CPI rose 1.2% in the September quarter, up from 0.8% from June's number, but as Michelle Marquardt, the ABS head of prices statistics noted, the September's number continued to be lower than those seen in 2022. The problem lies in the volatility of the quarterly figures, exaggerated by the price of fuel in particular, which rose 7.2% following two consecutive quarters where the cost of filling up at the pump fell. (If you hadn't noticed fuel costs have risen 20% over the past 12 months.)
So September's number of 1.2%, whilst higher than June's 0.8%, was still below the March figure of 1.4%, and still well down from all four quarters in 2022, which averaged 1.9% and led to a year end annual rate of 7.8%. Since that peak, the annualised number has been steadily falling, and is now down to 5.4% as shown below:
Cue Michele Bullock fronting the Senate estimates committee the following day, admitting that while slightly higher than the bank had been expecting, the numbers were pretty much "where we thought it would come out, given the information we've come into since then." The concern the RBA governor pointed to was in services inflation - electricity, rents and wages - which although "declining is still higher than it should be, and tends to be persistent." Therein lies the problem - although falling, inflation is staying higher than the December forecast of 4.1%, and still a long way from the RBA's target of 2-3%.
Bullock's dilemma (if she has one) is not only the volatility of the monthly numbers, but the persistence of higher inflation, which may lead to a vicious cycle of consumers' inflationary expectations adjusting upwards. If she increases rates on Cup day, the effect won't be evenly felt, and the risk of putting a dent in the economy remains - which is not what the "narrow path" journey is all about.
Our concern is to what extent would a further 0.25% to 4.35% prove to be an economic "tipping point"? We haven't discounted the RBA leaving rates where they are, or possibly giving them a nudge by 0.15%. Time will tell.
Albo, fresh from his Voice defeat, headed off to the US to be welcomed by a 21 gun salute, and as guest of honour at a black tie dinner for 300 at the White House, hosted by Joe Biden, who was technically wearing "a" black tie, just not a penguin suit and bow tie. Who would have thought Albo would be keeping Australia's sartorial standards up on the world stage?
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