Inflation falls again but it may not be enough for the RBA
While monthly and quarterly inflation registered an uptick in figures released this week, Australia’s annual inflation rate is still falling.
It’s now at 5.4 per cent, down from 6.0 per cent in the June quarter and the recent peak of 7.8 per cent in the December quarter of 2022. The progress to lower inflation is good news because the pressures of the cost of living and the cost of running a business are acute when inflation is high.
For the Reserve Bank (RBA), it is not clear whether this progress to return inflation to the 2-3 per cent target level is fast enough, hence the evolution of the emerging market consensus that a further interest rate rise will be delivered as soon as its next meeting on November 7.
At one level, further interest rate hikes are not needed. The inflation result was only one-tenth of a per cent higher than forecast – what a crazy world it would be if this puny forecast error saw the RBA hike interest rates again.
Another 25 basis points would add around 10,000-15,000 people to the unemployment queue as the economy slows more than is already locked in.
Is it worth it?
Also by the Kouk:
A number of issues are important for the RBA to consider when it assesses whether more rate hikes are needed.
There are already a record 400 basis points of interest rate rises in the system since May 2022 and that policy tightening is still working its way through the economy. At the same time, the economic data are unambiguous – GDP growth is weak, falling in per-capita terms.
Household spending - the backbone of the economy - has fallen in real terms for the past three quarters and is set to fall when the September-quarter data are released in coming weeks.
The labour market is also slowing and the forward indicators of labour demand, such as job vacancies and advertisements are on a clear trend down. There is little doubt unemployment will rise by around 150,000 people to 4.5 per cent on current settings. The RBA has admitted as much. As noted, further rate hikes will add thousands of additional people to the ranks of the unemployed.
At the same time, the economy is suffering from an extreme shortfall in new dwellings, a critical factor driving a surge in rents and house prices. The current restrictive settings for interest rates is a major hand brake on property developers and others from starting the new-dwelling-construction upswing that is needed to add to housing supply. Builders will simply not add to their always-limp pipeline of new activity while interest rates are restrictive.
