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My call on the future of interest rates
We got a low inflation number this week, which will, undoubtedly, delay the eventual raising of the official cash rate of interest by the Reserve Bank. Once upon a time we used to be scared of high inflation but now it’s the reverse — we fear disinflation or worst still, deflation.
What’s deflation and disinflation?
Disinflation is when prices rise at a diminishing rate, while deflation means prices are falling. The latter implies a recession is on the horizon, which would KO jobs and boost bankruptcies. This is why the RBA, the Turnbull Government and businesses would love to see some more inflation.
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How good is our economy?
In case you missed it, this was the news on inflation for the September quarter:
The Consumer Price Index – the main measure of inflation in Australia – rose by 0.6%, which was below expectations for a lift of 0.8%.
The annual rate of inflation fell from 1.9% to 1.8%. This number is found by adding up the past four quarters but if we took the September number and multiplied it by four, the inflation rate would be 2.4%, which is inside the band the RBA wants of 2-3%.
The underlying or more accurate inflation rate was 1.85%, so we are getting close to the 2-3% band.
Electricity rose by 8.9% in the September quarter, which won’t surprise many, while new dwelling purchase prices were up 0.8%. Tobacco was up 4.1% and international holiday travel & accommodation were up 4.1%. Petrol prices fell by 2.3%, while vegetables were down 10.9% and telecom equipment and services were 1.5% cheaper.
That inflation number is fibbing
While I was interested in the inflation number, as it has a big bearing on when the Reserve Bank raises interest rates, I have to say that I don’t believe the inflation number is telling us the truth! However, I say this as an economist and not as a statistician, and there is a difference.
So inflation isn’t an important number?
The economist uses these statistical creations to try to work out what’s going on in the overall economy, or specific parts of it. Then they’d speculate on what the Reserve Bank or government might do, or they could actually be advisers to these bodies. Once upon a time, when inflation was on the rise, we’d assume that the economy was doing too well, wages were rising too fast, unemployment was falling quickly, so interest rates had to go up until inflation seemed to be slowing down.
Times change, sometimes people don’t
And because this is what we economists believed in for decades, there are a lot of people who still believe it. That’s why the Oz dollar was 76.66 US cents late this week, after being as high as 82 US cents not long ago. Foreign exchange experts and their advising economists would have looked at yesterday’s inflation result for the September quarter and said this delays the first interest rate rise for Australia.
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So when will the next rate rise be?
I’ve said this before: some economists thought the first rate rise would be early 2018, while some think it will be mid- to late-2019! I’m with the majority who suspect that by mid-2018, the economy will be doing so well, say jobs-wise, that they’ll have to start raising interest rates.
Enjoy it while you can
Personally, I’ll keep enjoying these low rates until economic growth and falling unemployment, as well as rising interest rates in the USA, make the RBA give us our first rate rise.
Once upon a time, we got better economic growth, rising employment and falling unemployment in concert with rising inflation but it seems not so today.
Growth is picking up. Even job advertisements have recently hit a six-and-a-half-year high! This looks like a really good economy if you ignore low inflation and slow wage rises.
My $300 Boss suit!
What catches economists out is when the structure of an economy changes. Remember pre-1990 Australia? If you can’t, let me give you a quick snapshot.
This story was more an early 2000 story and involved a trip to The Outlet outside Palm Springs, USA. I bought a great Boss suit for A$300 and when I came home, I saw the same suit in DJs for $1,000.
What would happen today?
Some less than savvy shoppers would buy from DJs but the relative price may be $700 because smart shoppers buy their suits online. The online world, the more price-competitive world, the world of eBay, Dan Murphy’s, Zara, H&M, the Reject Shop and the Aussies who travel overseas annually or even twice a year, can buy their clothes more easily in Oxford Street, London, instead of Oxford Street, Sydney!
We shop the world now
A month ago, our employment report showed us that jobs created rose by 122,700 in the three months to August after a gain of 150,500 in the previous three months. “It was the biggest six month gain in jobs from records stretching back almost 33 years,” CommSec’s Craig James pointed out.
And that’s despite the fact that we can get bookkeepers in Bangladesh, website builders in The Philippines, we can use Trivago rather than a holiday consultant to book a hotel room in Paris and we can buy our books from Amazon!
Once you could trust the numbers
The world has changed and so has the structure of our economy. And we have to be careful of looking at things like inflation numbers and saying they show the economy is not doing well. Deregulation of exchange rates, financial systems and world trade along with globalization boosted by the Internet, challenged by digital disruption and emerging, price-reducing, Asian economies have really lowered global inflation.
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My favourite 5 euro T-shirt
When I was in Italy in June, I went to an H&M store and saw that young people and other savvy shoppers now pay 5 euros for a T-shirt. I was staggered and bought one and it’s my favourite T-shirt, even though I’ll probably throw it out and buy a new one next year!
The world is so different now
This is a different world and it’s why I’m a tad suspicious about what some economic indicators tell me. A few years, back when job ads went online and newspapers lost a lot of business, the ANZ job ads numbers were less reliable. Now both sources of info are integrated and the story this indicator tells is more believable.
It’s a mad, mad world
Many economists’ favourite economic indicators might need to be brought into the crazy, competitive world of the 21st Century and it’s because of this that I’m not too phased by the lower than expected inflation figure.
Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds.
