The inflation data gave everyone a shock last week. Do they really mean a rate rise is on the cards? Not if you look at where that inflation’s actually come from.
The inflation data last week went down like a fart in an elevator. And it was a rude shock to markets, who had been feet up in the sun, drinking martinis, safe in the knowledge that Cap’n Glenn was taking us all the way to cheap-town.
Suddenly, with one wild bit of data, that story’s all come undone. Suddenly, out of nowhere, a rate hike is on the cards…
Just calm your farm there sonny. Let uncle Jon take a look at the problem and see what’s going on.
First up, this graph here charts the underlying inflation rate. Remember the RBA has a mandate to try and keep that measure of inflation running at between 2 and 3 percent a year.
Well, look at that. 2.6% Smack bang in the middle of the target band. Makes you wonder what’s got everyone so worked up.
If there’s a wolf got in the hen house, it’s not obvious from here.
But it was really the change in the quarter that came as a shock.
The market consensus prior to the release was for a 0.5 percent change in ‘core’ prices in the quarter. Core actually came in at 0.9 percent.
That’s a big difference.
And that’s what put all those bees in all those bonnets. If inflation keeps this pace up, we’ll be up over the target band by the end of the year.
And if that happened, then you could pretty much lock in a rate rise. Glenn’d have no choice.
But I don’t think that’s going to happen.
Because if you go looking at where this pick-up in inflation came from, most of it seems to have come from the fall in Aussie dollar over the past 6 months or so.
The big-kicker items in the quarter were overseas holidays, audio and visual goods (all imported) and imported fuel. All things we buy form overseas and all things which are now, thanks to the fall in the AUD, more expensive.
On the domestic front, the only stand out threat to inflation is coming from house prices themselves. House prices were up 1 percent in the quarter thanks largely to ongoing growth in Sydney.
Another way to get at this idea is to look at the split between tradeables (things that can be bought and sold across country borders, like computers, and non-tradeables, which can’t – like fresh fruit and veg.
That’s what this graph here shows:
Non-tradeables have gone nowhere in the past couple of years. It’s the tradeables that have driven all the action. And most recently they’ve spiked. As I said, thanks to the fall in the Aussie dollar.
And so the surprise numbers last week are not a story about an economy starting to run a little hot. They’re all about a falling currency feeding through into higher prices for the things we buy from overseas.
And remember, inflation is all about measuring the change in prices. The level doesn’t really matter. That means that something like a fall in the dollar has an immediate impact on prices, but then washes out over time.
We’d only see more currency-related inflation if the currency fell further. That could happen, but it’s not something to worry about yet.
So step back and think it about it from Glenn’s perspective.
You’ve been banging on for ages about how you like to see a lower Aussie dollar – about how you think an over-valued Aussie is hurting the economy.
Finally, the Aussie dollar steps down a rung or two. But this creates some temporary feed-through into inflation.
But, there hasn’t been enough time for the lower dollar to light a fire under the domestic economy. There have been early signs of improvement, even in manufacturing, but it’s still early days.
Not only that, some of your other measures of economic performance are actually running a little lean. The week before the inflation data the jobs numbers surprised on the soft side. The unemployment rate was mostly unchanged, but a fall in full-time employment raised a few eyebrows.
And the outlook is far from certain. You’re still banking on the global economic ship not running aground or running into mines. And you’re still waiting to see how orderly the transition away from the mining boom at home is going to be.
And so even if you wanted to raise rates, it’d be a very hard-sell. You’d cop a lot of flack for it. You know at least Jon Giaan would come after you with a very big stick.
Put it altogether, and a rate rise seems practically impossible.
And so I reckon the only thing that changes with the latest inflation data is the timing of the next rate cut. I had been looking for something mid-year. Now, it might be a little later. Say September?
But one things for sure. Glenn’s going to be in no hurry to raise rates. He would know that rate hikes have no become a double-barrelled shot-gun.
In one barrel, there’s the shot to the domestic economy. Higher rates would crimp lending and activity, put a brake on consumption, and be an all-round poop in a bag.
But in the other barrel is a stronger dollar. If Glenn raised rates, AUD denominated assets would pay a better return, and demand for them would increase. This increased demand would increase the price, and the Aussie would go up.
Now Glenn’s already told us a hundred times how bad the over-valued Aussie has been for the economy. He won’t want to take us back there.
And so Glenn will be more than happy to sit on his hands, knowing that he’s got a powerful double-barrelled shot gun under his coat that could quickly restore things to balance if the inflation data turned out to be worse than we expected.
But he has the luxury of letting it run for a while before he needs to show his hand.
And so, for my money, all this means is that a rate hike is still off-the-table, and my money is still with another rate cut before the year is out!