Will the RBA hike?

So, Adam Carr is enjoying a spectacular victory lap having been the only one who dared contemplate a June rate rise. And fair enough too. Here’s is a sample:

The bottom line is that inflation is on the march – in addition to food, health costs are rising, as are the costs of education, rents, utilities, insurance, the list goes on. Consequently it is not really a relevant or a useful analytical contribution to point out that core inflation is only up 2.3 per cent year-on-year. The reason it’s at 2.3 per cent year-on-year is because of the anomalous outcomes we saw in the past three quarters. It is historical and that year-on-year figure is irrelevant in determining what trends are or what future trends might be – and the fact is the Reserve Bank’s target is not core inflation.

In my opinion the RBA should hike next week. The case is clear and there is no credible counter with the unemployment rate at 4.9 per cent, core inflation spiking and upstream price pressures surging. To suggest that the RBA can or should then sit around and wait now, for what I don’t know, with all the data where it is goes beyond hubris. The RBA has a job to do and they should just get on with it. In my opinion there is nothing left to wait for.

Well, that’s kind of true. Except, after a run of universally poor data for three months, we have had a recent breakout in four data points. The first was the April NAB survey, which showed labour costs potentially bottoming. The second was the March labor market data which was very strong and suggested pretty good gains across the nation. Last week we had good car sales and today, of course, the unsettling CPI. In my view that’s evidence of the economy emerging from its funk but it’s no slam dunk, especially coming on the back of the RBA’s intention to look through flood effects. But AC will have none of it:

Unfortunately I think there are just too many egos at stake here with most analysts arguing against the need for rate hikes – and that won’t change after today’s result. And of course I’m expecting a relentless PR barrage over the next few days – the usual stuff we get before every RBA meeting of retailer misery and consumer caution. The reality, we know, is much different with SUV sales at a record and sales of electronics etc very strong indeed. Consumer spending is and has been robust – prices are rising. So while I think the RBA should hike next week I still think June is still more likely given the political pressure the RBA is under from all directions. But I’ll talk more about that over coming days.

Glenn Stevens is a marvellously apolitical governor so we can discard AC’s “ego” idea as rubbish. And, once we get past the grandstanding, there are some analytical problems here. I accept the upstream costs argument  if by that AC means oil. Strong car sales are to some extent flood related as Queensland showed a pop for replacements. Outside of that, however, consumer sales remain well below historic trends, especially in the household items AC singles out. It is one area of the economy still showing clear price deflation.

Today’s CPI release was about three things. Housing and construction-related inflation. Oil-related inflation. And flood-related inflation. The RBA has said repeatedly that it will look through the last. The construction and utilities components of housing are competing directly with the boom sector for resources. But it is a chronic problem that is keeping the CPI base permanently higher rather than a sudden problem.  On oil, they can’t do much but will nonetheless see it as a generally inflationary force across everything. There is some offset, however, in the fact that because consumption is weak, petrol prices are also going to be deflationary. As we’ve illustrated several times, there is a very strong correlation between consumer confidence and oil prices.

None of these data points cast any further light on the central question of labour costs, which is the one that will be bothering the RBA most.

The Stevens RBA has been clear that it is most closely focussed on managing the medium term commodity boom, so the question you need to ask yourself  is: will they see it as necessary to further deflate the services economy now to offset the inflationary forces, such as they are, before more commodity investment pours in?

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. michael francis

    Last week we had good car sales. So good that Ford and Toyota decided to lay off workers. Figure that one out.

  2. Both oil-related inflation and construction-related inflation and are a function of the boom in commodity prices. Something the RBA can’t “fix” with a rate rise.

    If commodity prices were to collapse (like they did in late 2008) mining projects would be postponed or cancelled, and a lot of tradies would be freed-up for utilities and residential construction. The effect of much lower oil prices requires no explanation.

  3. Going on market yields as of last friday, which seem to be a pretty good indication, the RBA will not ‘raise’.

    In fact, there are signs of stress in the ‘money’ market. I’m not predicting it but a cut in the target rate looks just as likely as a raise.

  4. Deus Forex Machina

    Market Strategy at its best.

    This fella is really taking the straw man thing to the extreme here. Crowing triumphantly before a hike but equally telling us everyone else is going to attack him. This is a ploy to generate publicity

    But where is his real call… he reckons it should be next week but of course our politically RBA will fold and hold off. As if. Anyone remember Melbourne Cup Day???

    If the RBA is true to label and a medium term outlook then this number will have them back on inflation watch but we can’t tell if its a one off till the next release so surely August at the earliest is live.

    Heaven help us from his analytical framework.

    BTW…market pricing as at cob today has overnight index swaps (ois) reaching 5% in May 2012. That’s a proxy for cash. Might be a little sanguine but no vitriol here just people trading.

  5. I think Adam’s trying too put,
    A Head on a Chook..
    Predicting a majority can afford it…

    Cheers JR

  6. I don’t understand this CPI.
    I would probably understand it if it was divided logically in goods I need on a daily/weekly base (groceries, petrol etc.) and the goods I shop every decade once for.
    That index is confusing as it tries to blend things together, bake it, and giving it a resource driven icing on top to present on a silver tray how good everything is in Australia.

    Or am I supposed to run around every month and shop a new car, TV set, home entertainment cinema, computer?

    Why isn’t there an adjustable more flexible interest rate? Something like a currency exchanger which reacts immidiatly on the market and is not bolted to some people with vested interest for one side?
    As I am not an economist like most of you I am not able to produce a index this interest rates should be coupled to – maybe it needs to be invented first. But this system as it is right now could be improved – I am sure.