On July 27th at 11:30am a very large number of Australians will be flocking to the Australian Bureau of Statistics web site to check out the June quarter inflation numbers. Maybe I’m just growing old and boring, but I can’t recall a time when the quarterly CPI figure had been so eagerly anticipated.
The reason everyone is getting so twitchy comes back to interest rates of course, or more specifically, how the Reserve Bank will react if inflation tracks higher. The Reserve Bank has an inflation target where monetary policy is set with the aim of keeping the annual inflation rate between 2-3% over a medium term average.
You can see the policy in action in the graph below which tracks inflation over a long time series. The inflation target was introduced in 1993; the effect of this ‘inflation mandate’ is clearly visible from 1993 onwards with inflation rarely straying outside the 2-3% band for any length of time.
Together with their inflation mandate (amongst others), it’s also timely to point out that the Reserve Bank has a Charter – available for all to read here. The key elements from the Charter are that the Bank’s monetary policy must best contribute to:
- the stability of the currency of Australia;
- the maintenance of full employment in Australia; and
- the economic prosperity and welfare of the people of Australia
Keeping within the inflation target range and adhering to the key elements of the Charter are seemingly at odds with each other on this occasion. While headline inflation is will likelyremain above 3% (March reading was 3.3%) and the underlying rate of inflation is likely to move upwards (March reading was probably the turning point at 2.3%), it’s looking to be an increasingly safe bet that the RBA will look through the rises for the sake of the ‘economic prosperity and welfare of the people of Australia’.
Essentially, the bank needs to spark some confidence back into the consumer mind set, encourage more spending and assist with improving conditions outside of the resources sector.
Further to that, it is fair to expect that the RBA statements will continue the softer line proclaimed in the latest minutes – essentially that the strength from the resources sector and growth in neighbouring Asian economies will continue to be tempered by global economic jitters, weak consumer demand, a slowdown in jobs growth and slow business conditions outside of the resources and services sector.
On a related topic, considering the Bank’s reliance on inflation readings to guide monetary policy, it is painfully clear the quarterly measurement of CPI simply doesn’t provide the necessary timeliness or granularity that is essential for making these important decisions that affect every single Australian. You may recall that the Australian Bureau of Statistics recommended a move to monthly CPI measurement in a proposal released back in December last year. The proposal was knocked on the head due to insufficient funding. Costs aside, with so much attention on this key metric and a private sector measure gaining a fair amount of traction (TDI Securities/Melbourne Institute Inflation Gauge) we may be seeing a similar situation to where the ABS House Price Index has lost most of its relevance, replaced by private sector measures that are more timely, more granular and arguably more accurate. No guesses for which Index I am referring to there…
As a side note, the proposal for moving from a quarterly CPI measure to a monthly one was estimated to cost $15 million per annum plus a once off $6 million to produce the report (which seems insanely high to me). Compare this with the not so trivial Federal Budget expense item of $309 million to provide pensioners with a $400 set top box (or $30 at the shops for those who don’t get one from the Government) and you start to question where the priorities lie.