With all the armchair economists now predicting the Reserve Bank will have to reverse itself and start lifting interest rates this year (November according to the NAB yesterday; much earlier, according to Westpac) because of the unexpectedly high surge in inflation in the December quarter and 2021, there’s a question they are all avoiding answering.
How will a rate rise or rises down under control the single greatest driver of the annual inflation rate of 3.5% in the rising price of petrol, especially with oil prices breaching $US90 a barrel on Wednesday for the first time since late 2014?
All eyes will be on the RBA’s February monetary policy meeting. The central bank is expected to announce the end of its quantitative easing program and bring forward the timing of when the cash rate will begin increasing.
The upside surprise in December quarter inflation data, alongside the strong December employment report are behind the more abrupt adjustment to normalising monetary policy settings being expected.
Subdued wage growth remains a thorn in the side of the central bank. A key item to watch in the February statement will be whether the RBA holds onto the view that they won’t move on the increasing the cash rate until wage growth sees sustained acceleration.
The Australian Bureau of Statistics said the December quarter’s Consumer Price Index rose 1.3% in the last quarter of the year to be up 3.5% over the year. The underlying rate favoured by the Reserve Bank rose an annual 2.6%, above the central bank’s forecast for a 2.25% at the end of 2021 (so a miss there, tsk, tsk).
The ABS said higher petrol, child care costs and rising new home costs were among the main drivers for the higher than forecast (economists were expecting a rise of 0.8% to 1%).
A 4.2% rise in new dwelling purchase costs for home buyers (a direct outcome from the Homebuilder subsidy for new homes and renovations) a 6.6% jump in petrol were the biggest price rises over the quarter, followed by a 6.5% rise in childcare costs. Food and non-alcoholic beverages increased 0.7%, with clothing and footwear up 2.6%. Petrol prices rose 32.3% in 2021, which tells us why the CPI rise was outsized and such a surprise.
And the price is going to rise further given the continuing tension between Russia, Ukraine, the US and Europe – a fertile ground for rising oil prices, petrol prices and wild currency swings.
So how can a rate rise or three from the RBA control the largest driver of Australian inflation? You can bet that Vlad Putin sitting in the Kremlin will be saying to himself, “the Fed and the RBA (and other central banks) are putting up interest rates to control inflation because I am threatening to invade the Ukraine. I must do the right thing and play my part in cooling things and withdrawing my tanks and allow oil prices to fall.”
And, besides OPEC (and that staunch western ally, the murderous Saudi regime), guess who has been the biggest beneficiary of the soaring price of oil: why, old Vlad Putin in the Kremlin and his bunch of thugs.
Let’s all fall about laughing if anyone really thinks a RBA rate rise or three (and any from the Fed, as it threatened on Wednesday) will have any impact on Vlad or his foreign policy (and self-enrichment) or on oil prices.
Australia, like every other major economy is a price taker when it comes to energy.
Global oil prices are up 60% in the past year and the ABS said petrol prices rose 32.3% in 2021 following the oil price rise.
In a note explaining the influence petrol prices have on Australian inflation and the CPI, the ABS said on Tuesday:
“Automotive fuel prices are often volatile, which can have a significant impact on the rate of inflation measured by the CPI. A recent example of this was following the outbreak of COVID-19, where prices for automotive fuel fell 20 per cent in the June 2020 quarter, contributing nearly half of the record 1.9 per cent quarterly fall in the CPI.
“Following the low point in mid-2020, fuel prices have increased 45 per cent up to the December 2021 quarter.”
The ABS said Australians spend around $2,300 a year on petrol which accounts for 3.3% of the CPI basket.
Do any of our armchair economists really think interest rate rises in Australia will have any impact on oil and petrol prices except to increase the cost of living for millions of people already paying high prices for fuel.
Covid has been a saving grace of sorts because it has reduced the impact higher fuel prices on many consumers who have curtailed their driving thanks to lockdowns and office closures and working from home measures.
The most telling part of the ABS analysts of the CPI was the push higher petrol prices gave to goods price inflation – 4.3% over 2021 against a rise of 2.3% in services.
That confirms that the rise in services (which dominate household consumption – retailing is a major part) saw some cost rises, but that was well within the bank’s 2% 3% target range.
It was goods costs and (which is a big deal given that more than 66% of Australian economic activity is services based these days).
That is old fashioned inflation and with the supply chain problems beyond our control, or subject to the vagaries of Covid infection rates, the ability to control that via monetary policy is much less than if inflation was being driven from the services side (such as rising wages).
The influence of rising oil and petrol prices was seen in the ABS trade prices index for the December quarter. The import index posted its biggest rise in eight years of 5.8% in the December quarter, to be 13.8% up on the year.
It showed imported petroleum products jumped 14.6% in the quarter and a staggering 79% over the year. With price rises like that it’s no wonder the CPI surged 1.3% in the final quarter and 3.5% for the year (strip out oil and petrol and the rise was less than 2.5%).
As the ABS explained in its CPI commentary: “Price rises in automotive fuel and new dwelling purchases were the main contributors to Goods inflation in 2021. Prices also increased across a broad range of other goods with strong demand and supply disruptions leading to price rises for goods such as furniture and motor vehicles.”
That tells us we do not have an inflation problem in the conventional sense – the cost of housing is within our control and can be moderated by through higher interest rates or prudential policy tightenings and the very positive impact of the government subsidies for new homes and renovations is slowly working itself out to the system and will start being felt as approvals for new homes and renos fall sharply later this year.
But a rate rise or rate rises to control inflation when the price is set outside Australia, is being heavily influenced by global tensions (and demand) and is current being directed by the biggest beneficiary of that tension in Vlad Putin?
To quote The Castle, tell ‘em – the armchair economists, that is – they’re dreaming.
