Sure today's inflation figures are low, but inflation is actually lower than it looks. That means the Reserve Bank doesn’t just “have room” to loosen monetary policy, as Julia Gillard puts it – the Reserve Bank is forced to cut rates to stimulate the economy to keep inflation within its target range.
The headline CPI rise of 1.6 per cent is certainly a low number and the Australian Bureau of Statistics’ seasonally version is lower again at 1.5 per cent. (The two biggest areas of price rises, pharmaceuticals and secondary education, always jump in the March quarter thanks to the structure of the PBS and when schools put up their fees for the new year.)
But those headline figures don’t matter all that much to the RBA which concentrates on the “trimmed mean” and “weighted median” measures that try to exclude the extreme movements both up and down.
Those measures for the year to the end of March are down to 2.2 and 2.1 per cent respectively – the bottom of the RBA’s comfort range but still within it and well down on the 2.6 per cent annual score in the December quarter.
The thing about annual figures though is that the June quarter is a long time ago with plenty of global financial turmoil passing under the bridge since then. What might concern the RBA a little more is what happens when you annualise the TM and WM measures over the most recent six months: you get 1.8 per cent, falling below the target.
The RBA’s job is to keep inflation within the 2 to 3 per cent range “over the cycle” so it’s not going to panic about a couple of sets of figures and dramatically slash rates, just as it didn’t dramatically increase rates when it’s measures were running above 3 per cent, but that annualised figure should be enough to pencil in another 25 points reduction in the cash rate at the board’s June meeting on top of the 25 per cent cut now guaranteed on May 1.
There will be some who will argue that today’s figures are low enough to allow a 50 per cent cut straight away, but I suspect that would smell a little too much of unseemly haste for a cautious institution. And there is the federal budget to consider, the need to see just how solid the promised fiscal drag of around 2.5 per cent turns out to be.
Besides, it is the expectation of rates as much as the reality of them that’s supposed to do the trick for consumer confidence.
“Rates are coming down” has plenty of promise in it, while “rates are down” carries an inference that that is as good as it’s going to get and that the next move might well be up.
And the low inflation numbers, even though lower than they at first look, still have to be kept in some perspective. The capex boom is still growing with its impact yet to be fully felt.
While the labour market is soft, unemployment is still low by historical standards. The necessary but painful restructuring of our economy into one of stronger productivity growth and greater value-add still has a long way to run.
Furthermore, a fair whack of the falling prices are only another seasonal disaster away from rising again and the great challenges of managing higher health costs and the need for increased education investment remain out there, never mind March quarter seasonal factors.
Solly Lew and Paul Howes will get their May 1 rate cut and probably a June cut as well. The extent to which it puts a spring in the consumer’s step is not certain as we have talked ourselves into a level of domestic political concern and continue to be prey to all the scary headlines about the “old world” even while our world, our weighted trading partners, are motoring at about average speed.
Finally, there is the public disbelief factor: we remember our last electricity bill and have become convinced the cost of living is rising outrageously. Egged on by the usual tabloid media tendencies, most people simply won’t believe the ABS measure of inflation, plus we have the spectacle of the least unpopular side of politics forecasting that we’ll suffer economic and inflationary disaster at the hands of the carbon tax.
Even when you get what you wish for, sometimes it’s not much.
Michael Pascoe is a BusinessDay contributing editor