Yes inflation remains a problem in Australia, and no it won’t mean higher interest rates, not when the banks have added more than half a per cent to the Reserve Bank’s 1% of increases in the past 11 and a half months.
And, not when oil prices have risen so far,and maybe now on the turn.
It was in August of 2007 that the bank commenced its latest round of rate rises to try and nip what it knew was an outbreak of inflation occurring from our booming resource economy.
That rate rise came on August 4: five days later the credit crunch arrived and hasn’t left us: the bank lifted rates three more times, each by 0.25%, but in January the banks started adding extra increases, and then more rate rises when their cost of funds rose as the crunch ended the easy money days and lifted all rates across the world.
Inflation still rose, but since March the RBA has sat and waited for its increases and those from the banks to work their way through the system: suddenly oil prices, which had been rising through $US80 a barrel late last year, and then through $US90, and then $US100 a barrel, took off in the June quarter and hit a peak of $US147 and change.
Retail and housing slowed, car sales eased in the June quarter and now TV advertising has stalled with no real growth in the June half and the RBA realised that the surge in oil prices had delivered the equivalent of one, perhaps two more rate rises of 0.25%, strangling demand, forcing up costs and hurting the entire economy.
That’s why it has been warming us up for a big inflation rise in the June quarter, and why it has been telling everyone, in its opaque central banker way, that it will wait and see what happens.
The bank knows the economy has been hit with two massive shocks: the most brutal tightening in monetary policy in decades with a rise of more than 1.5% in all rates (and more for some clients of non-bank lenders) and now the huge increase in oil prices.
That’s why the 1.5% rise in the headline Consumer Price Index in the June quarter, to produce an annual rise of 4.5% in the 2007-08 financial year, won’t bring a rate rise when the RBA board meets Tuesday week.
The Australian dollar edged higher, but not by much, while the stockmarket built on early gains after digesting the news.
According to figures from the Australian Bureau of Statistics they were the highest quarterly and yearly figures for 13 years, the GST-induced increases in 2000 and 2001 excepted.
As expected it was higher fuel (especially petrol) costs, housing and most financial services (the impact of the extra rises from the banks), which were the main culprits. Food costs eased in the quarter.
Some excitable commentators had pushed the line in recent days that a smaller than expected rise could be possible, given the slowdown in the domestic economy.
The surge from higher oil and fuel costs, financial services and housing meant the figure was always going to be high, but not even market economists reckoned on the 1.5% rise for the quarter as the median forecast was 1.3%. Food costs eased 0.1% in the quarter, thanks to a surge in supplies of fruit and vegetables, a point remarked upon by Woolworths in its 2008 sales figures report last week.
The latest figures compare to the 1.3% rise in the March quarter and the annual rate of 4.2%.
Our annual rate of 4.5% is high: the US rate in the year to June was 5.0%, the UK had an annual rate in the same period of 3.8% and inflation is running at a 3.7% rate in Europe.
The quarterly and yearly rises were the highest since 2000-01 when the impact of the introduction of the GST rippled through the economy. Apart from that, the June headline figures were the highest since the first half of 1995.
But the Reserve Bank won’t change its neutral stance on rates.
It has been warning the market for the past six weeks to expect a larger than normal increase in the CPI for June because of the impact of higher fuel costs (the RBA said higher petrol prices would add 0.25% to the June and September quarter CPIs) and sending a signal that such a rise would not force a rate rise when the board meets in early August.
As well the bank sees the extra rate increases from the bank (more than half a per cent) as further tightening monetary policy on top of its 1% increase in the cash rate to the current level of 7.25%.
The bank’s own measures showed an increase, but are now in line with the headline increase.
The RBA’s Weighted Mean measure rose 1.0% in the June quarter (compared to 1.3% for March quarter) and 4.5% for the year (4.4% in the year to March).
On a trimmed mean basis the quarterly CPI rose an unchanged 1.2% on the March quarter, to be up 4.3% from a revised 4.0% (4.1% originally).
Even though they are well above the RBA’s 2% to 3% annual rate target (over time), there are signs of some slowdown; signs that were also seen in the produce price indices for the June quarter which were released earlier in the week.
There were also some worrying signs” non tradable goods inflation jumped by more than 5%, while tradable goods inflation was lower (because of the influence of the strong dollar). For more details on what drove inflation to these levels in the quarter, see the story below.
