The inflation figure that is due to be announced is different from most other figures, which is what attracts the attention of politicians and economists alike.
Inflation has fallen over the past five quarters, moving closer to the Reserve Bank’s target range.
In the last quarterly reading, three months ago, it wasn’t far off. Inflation had reached 3.6%well below the peak. 7.8%and in plain sight 2-3% Squad.
There was talk about interest rate cutSoon. It’s a good idea to ease interest rates before inflation actually hits the target range, for the same reason it’s a good idea to ease off the gas and hit the brakes before you want to stop your car: interest rate changes affect things. With delay.
Now there are expectations that the number due out on Wednesday will show that inflation has risen, perhaps to 3.8%maybe not 3.9%or perhaps 4% or more.
What concerns politicians is the possibility that the RBA will conclude that progress on tackling inflation has stalled, and that it needs to raise interest rates at least once more to ensure inflation returns to falling.
The bank may do so after its board of directors meets in Tuesday next weekWhen the central bank publishes its quarterly statement on where the economy is heading.
Will we see another rate hike before the election?
Raising interest rates in the run-up to next year’s election could do to the Albany government what the pre-election rate hike did to the Morrison government – help push them out of power.
But I think there is a good chance that the Reserve Bank will not raise interest rates, even if inflation is high, for a number of reasons.
The first is that the Reserve Bank Itself The European Central Bank had expected inflation to be 3.8% in the year to June. Inflation fell to 3.6% earlier than expected in March, and if it rises back to 3.8% things will be back to normal.
Britta Campion/AAP
What matters most to the bank are the factors driving inflation. Last June, the bank’s new deputy governor shared his thoughts on this issue.
Andrew Hauser took over at the Federal Reserve in February, after a career spent helping set interest rates at the Bank of England.
He pointed out that inflation in commodity prices is declining. faster of inflation in service prices, but he said this was not unusual. In most countries, the pictures looked “incredibly similar“.”
Perhaps the reason for this was that higher interest rates were taking “a little longer” to dampen inflation in services prices than in goods. If so, the correct response would be to “keep calm” and note that inflation in services prices was falling but “in a slightly unsteady way.”
Some prices are outside the control of the Reserve Bank of Australia.
Another point that Hauser was particularly keen to highlight is that the prices of many services are “managed” – that is, set by the government or a judicial body.
The prices of childcare, hospital care, electricity, water, gas and public transport are largely managed and are outside the Reserve Bank’s ability to influence interest rates.
There was an “interesting question”. Should the Reserve Bank exclude these prices from its inflation target, since it cannot target them, and just target the rest? Or should it push the rest “a little” to bring overall inflation back to target?
Inflation in other prices falls
Hauser said that if one calculated the inflation rate based only on the things the Fed can influence, one would find that the rate is already too low.
So this week, ANZ economist Blair Chapman said: Did you do that – And that’s what he found. Inflation at rates that the Fed can easily influence has already returned to its target range.
Inflation in other prices—administered prices, or prices automatically linked to past inflation—remained above range, but was on a downward trend.
Hauser pointed out another point that he thought was very important to him, as a newcomer from the UK: Australia. Isn’t it the United Kingdom?.
In the UK, the Bank of England’s primary objective is to return inflation to target. Everything else comes secondary, and is subordinate to the primary objective, including supporting economic growth and employment.
In Australia, there is a “more balanced goal”.
Full operation has the same weight.
Here, the Reserve Bank has Two goalsNeither is superior to the other.
The first is “consumer price inflation of 2% to 3%.”
The other solution is “full, sustainable and inclusive employment where everyone who wants a job can find one without having to search for a long time.”
The Reserve Bank does not have the right to give preference to one over the other.
Australia has chosen to give more weight to employment than the UK, and “frankly, that strategy has worked so far,” Hauser said.
The number of jobs that are being created is just enormous. Sometimes you talk about not celebrating success enough; but this is an incredible achievement. And when you think about adjustments of this magnitude in the past, they have always involved very sharp adjustments in the labor market.
Hauser likes what he sees in Australia. “There’s not much not to like here.”
If the price of Australia’s focus on jobs is that “services inflation takes a little longer to fall”, he gives the impression that he is not too worried.
When the Fed makes its decision next Tuesday, it will be less concerned with how high inflation is (that’s what this week’s numbers will tell us), and more with where it’s headed — which is probably down.
It will be about where employment is going, which is also likely to decline given very weak economic growth.
If Wednesday’s numbers show inflation rising to alarmingly high levels, the Fed will have no choice but to raise interest rates next week. But otherwise, the Fed is likely to hold its ground and watch inflation continue to decline.
