The Times Australia
The Times World News

.
Times Media

.

Inflation is sinking ever lower. Now that it’s official what’s the RBA going to do?

  • Written by John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of Canberra



Lower petrol prices and an electricity rebate have contributed to a further fall in the quarterly measure of inflation[1], the Consumer Price Index.

The rate in the September quarter dropped to 2.8%, putting it for the first time within the Reserve Bank’s target range[2] of two-point-something since the March quarter of 2020.

The fall was broadly in keeping with market expectations, and keeps low the likelihood of an interest rate cut this year. The next Reserve Bank meeting is scheduled for Tuesday.

The bank pays more attention to the long-running quarterly measure of the CPI than the more volatile monthly version[3] which already dropped into its target range in August.

The monthly measure[4] dropped further, to 2.1%, in September.

The quarterly CPI is also more important because it is included in all sorts of workplace and other contracts and indexation formulas.

The main reason for the fall in inflation was the electricity rebates announced in the federal budget and by some states.

Also helping were the falls in petrol prices, mainly reflecting declines in global oil prices. Cheaper or free public transport in Brisbane, Canberra, Hobart and Darwin also contributed.

Preventing a larger fall were the continuing strong growth in insurance costs and rent. The rise in insurance costs reflects a series of extreme weather events such as bushfires and floods. It is a way in which climate change is exacerbating inflation.

Contrary to what many people think, the increase in rents is not due to landlords passing on higher interest rates. Landlords may want to do this but they are only able if vacancy rates are low, otherwise tenants just move elsewhere.

History shows it is low vacancy rates that drive up rent regardless of the level of interest rates. The inability of landlords to pass on interest rate increases has been confirmed by a study just published[5] by the Reserve Bank using tax return data.

It showed that only three cents of every dollar in extra interest costs is passed on.

The fall in inflation to a rate significantly below the 4% at which wages are increasing[6] means that the cost of living crisis[7] is abating, although not yet over.

The dramatically lower inflation rate puts Australia in a comparable position to the United States[8], whose inflation rate is 2.4%, the United Kingdom[9], whose inflation rate is 1.7% and New Zealand[10] where it is 2.2%.

The US, UK and New Zealand all have inflation targets (or midpoints) of 2%, so inflation is now only slightly above the target in the US and New Zealand. It is actually below it in the UK. In response all three have cut their key policy interest rates.

Yet it is unlikely that the Reserve Bank will follow their lead until next year, despite growing pressure.

One reason is that, even after their cuts, interest rates in our three peers are still higher than in Australia, at around 4.75% to 5%.

But more importantly, the Bank has stressed recently that it pays more attention to the “underlying” rate of inflation, which looks through temporary measures such as the electricity subsidies. The Bank will only cut interest rates when they are “confident that inflation was moving sustainably towards the target range”[11].

The bank’s preferred measure of underlying inflation, the so-called trimmed mean[12], has also fallen.

But at 3.5%, it is still above the target. A positive aspect is that it has reached 3.5% ahead of the Bank’s most recent forecast[13] which had 3.5% only being reached by the end of 2024.

Monetary policy, however, has in Milton Friedman[14]’s famous words “long and variable lags”[15].

As the then future governor Glenn Stevens remarked[16] back in 1999, “the long lags associated with the full impact of monetary policy changes mean that policy changes today must be made with a view not just to what is happening now, but what is likely to be happening in a year’s time and even beyond then”.

In other words we want to drive by looking ahead rather than just at the rear view mirror. The Bank is like a footballer who needs to head to where the ball will be rather than where it is now.

There is therefore a risk that if the Reserve Bank keeps interest rates high until inflation reaches the middle of the target, it will be too late to prevent the economy slowing too much and inflation will undershoot the target. This would likely be associated with unnecessarily high unemployment.

That is why the Reserve Bank board faces a difficult balancing act in taking its decisions.

References

  1. ^ quarterly measure of inflation (www.abs.gov.au)
  2. ^ target range (www.rba.gov.au)
  3. ^ volatile monthly version (theconversation.com)
  4. ^ monthly measure (www.abs.gov.au)
  5. ^ study just published (www.rba.gov.au)
  6. ^ wages are increasing (www.abs.gov.au)
  7. ^ cost of living crisis (www.theguardian.com)
  8. ^ United States (www.bls.gov)
  9. ^ United Kingdom (www.ft.com)
  10. ^ New Zealand (www.rbnz.govt.nz)
  11. ^ “confident that inflation was moving sustainably towards the target range” (www.rba.gov.au)
  12. ^ trimmed mean (www.rba.gov.au)
  13. ^ Bank’s most recent forecast (www.rba.gov.au)
  14. ^ Milton Friedman (www.nobelprize.org)
  15. ^ “long and variable lags” (www.journals.uchicago.edu)
  16. ^ remarked (www.rba.gov.au)

Read more https://theconversation.com/inflation-is-sinking-ever-lower-now-that-its-official-whats-the-rba-going-to-do-240336

The Times Features

The Gift That Keeps Growing: Why Tinybeans+ Gift Cards are a game-changer for new parents

As new parents navigate the joys and challenges of raising a child in the digital age, one question looms large: how do you preserve and share your baby's milestones without co...

Group Adventures Made Easy: How to Coordinate Shuttle Services from DCA to IAD

Traveling as a large group can be both exciting and challenging, especially when navigating busy airports like DCA (Ronald Reagan Washington National Airport) and IAD (Washington...

From Anxiety to Assurance: Proven Strategies to Support Your Child's Emotional Health

Navigating the intricate landscape of childhood emotions can be a daunting task for any parent, especially when faced with common fears and anxieties. However, transforming anxie...

The Rise of Meal Replacement Shakes in Australia: Why The Lady Shake Is Leading the Pack

Source Meal replacement shakes are having a moment in Australia, and it’s not hard to see why. They’re quick, convenient, and packed with nutrition, making them the perfect solu...

HCF’s Healthy Hearts Roadshow Wraps Up 2024 with a Final Regional Sprint

Next week marks the final leg of the HCF Healthy Hearts Roadshow for 2024, bringing free heart health checks to some of NSW’s most vibrant regional communities. As Australia’s ...

The Budget-Friendly Traveler: How Off-Airport Car Hire Can Save You Money

When planning a trip, transportation is one of the most crucial considerations. For many, the go-to option is renting a car at the airport for convenience. But what if we told ...

Times Magazine

Types of EV Chargers

The world of electric vehicles is a confusing one, filled with abbreviations and acronyms that even the most seasoned EV drivers can't keep straight. It's also a rapidly changing landscape where cutting-edge technology is being developed at an in...

The Guide Dogs Australia and Black Hawk pet food ultimate Dog Care Guide

GUIDE DOGS AUSTRALIA & BLACK HAWK JOIN FORCES TO RELEASE THE ULTIMATE DOG CARE GUIDE WITH TIPS YOU CAN TRUST Guide Dogs Australia is proud to announce Black Hawk as its new dog food partner. Joining forces to ensure that Australia's most tru...

What Cycling Gear Do You Need the Most?

We believe everyone needs to prioritize their safety and comfort while cycling. That's why helmets top our list, as they're critical for protecting your head in case of an accident. We also can't overlook the importance of reflective clothing and lig...

Greening the Workplace: How Government Offices Are Embracing Paper Bags for a Greener Future

In today's world, where climate change and environmental sustainability are at the forefront of global concerns, businesses and organizations are actively seeking ways to make a positive impact. One such sector taking a proactive approach is gove...

Direct Mail Marketing in the Digital Marketing World

Nowadays marketing is primarily digital because it is cheap and easy to set up and maintain, and has a wide reach. However, direct mail marketing can still have a significant positive impact on your business. In fact, combining direct mail marketin...

10 Important things to know about moving to Sydney

Do you want to start a new life in the Southern Hemisphere, Sydney as a resident of Melbourne? Before moving to Sydney, hire Melbourne to Sydney removalists. Also, prepare yourself and read our list of things you need to know before moving to Syd...