Yahoo Finance Inflation is down yet the RBA keeps making mistakes and it is costing you
Inflation has hit the RBA's target band. So, why did the board not cut interest rates?
It has been a huge couple of days for news on inflation and interest rates. The spectacularly good news is that inflation is back in the target range and is set to fall further as the weak economy, rising unemployment, global deflation pressures and wage moderation all kick in.
According to the August consumer price index, annual inflation fell to 2.7 per cent, down from the peak of 8.4 per cent in December 2022 and, for the first time in many years, it is back in the target band.
Such is the momentum in the economy and inflation that there is a strong possibility, even probability, of inflation hitting 2 per cent or less in the next few months.
This inflation free-fall shows that the aggressive interest rate hikes from the Reserve Bank of Australia (RBA) between May 2022 and November 2023 are working.
The economy has been smashed, unemployment is marching higher and inflation is cascading back to the target.
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The fall in inflation was, in part, driven by the effect of the $75 per quarter electricity subsidy to consumers from the Federal government and the fall in petrol prices which are down more than 7 per cent over the past year.
These disinflationary factors were offset, in part, by the government excise increases, especially for tobacco and alcohol.
Plus the rise in education, insurance and health care, none of which are influenced all that much by interest rates, be they rising or falling.
The RBA forecasts for inflation are clearly too high.
This is one reason why is has been reluctant to join the rate cut club around much of the world, where central banks are looking at their weak economies and falling inflation and cutting interest rates.
The shock amid all of this is that the RBA left interest rates unchanged at its meeting this week, with rates at a heavily restrictive 4.35 per cent.
Governor Michele Bullock indicated that an interest rate cut was not on the Bank’s agenda despite weak growth, rising unemployment, global rate cuts, moderation in wages growth and falling inflation.
It is her assessment that some parts of inflation are ‘sticky’ and that the labour market is still ‘tight’.
These judgments, which are only a small part of the economic picture, feed into the RBA forecasts for inflation to remain high.
Indeed, Bullock downplayed the fall in inflation saying that the focus of the Board was some artificial measure, the so-called underlying or trimmed mean inflation rate, even though there is no mention of those inflation measures in the RBA Statement on the Conduct of Monetary Policy which she and Treasurer Jim Chalmers signed in December 2023.
In other words, the RBA is refusing to cut interest rates because it is guessing that the step lower in inflation in August will be temporary, a call that is based on faith, not facts.
In the end, the markets embraced the low inflation result and yet again discounted the RBA view of the economy by pricing in a better than even chance of a 25 basis point interest rate cut before the end of 2024 and a total of 125 basis points of interest rate cuts by the end of 2025.
From this perspective and on any cool-headed and sober analysis of the economic data, especially for inflation, this looks about right.
Of course, things can change quickly and markets can reprice the outlook for the economy.
The next couple of labour force and consumer price index releases, in concert with interest rate decisions from around the world will feature in what will be a clear about-face from the RBA sooner rather than later.
Inflation has been beaten. The focus now is limiting the rise in unemployment.
