The bullhawks are back. A different flock perhaps but the same species. Today’s CPI has the Kouk calling a rate hike in February and many other others fearing rate rises later this year.
They are all fumblingly wrong, again.
Inflationary pressures have risen in the economy, not least via tradable inflation. But most of the big price hikes in the December quarter will pass – tobacco tax is a one off, fruit & veg will correct, tourism is seasonal – so I expect pressures to remain contained as the year rolls on. As well, income growth is falling, wage growth is historically low and isn’t going anywhere so there’s no danger of a wage push inflation cycle.
All of the economists focused on the CPI and a little rebound in inflation are focused on the cyclical forces underway – housing, consumption and a falling dollar. What they are missing is why interest rate are so low in the first place. That is the post-mining structural adjustment we are entering, which is huge and only beginning.
Australia’s real exchange rate remains historically high, our competitiveness historically low. The progress of the terms of trade correction has significantly further to run. The enormous mining capex cliff has barely begun.
If the RBA were to hike now, or any time this year for that matter (and maybe next as well), fair dinkum recession is a probable scenario as the investors driving the housing rebound dive for the exit.
That’s one path to an accelerated post-mining boom adjustment to higher competitiveness but it’s a catastrophic one and not the approach public policy will recommend.
The RBA will not hike. It will keep talking down housing and watch as New Zealand’s macroprudential policy reaps dividends. If housing refuses to slow enough here it will threaten to bring such policies to Australia. If it still doesn’t slow enough it will enact them. In that event we’ll probably still need a lower dollar so we may well see more rate cuts.
Meanwhile, it will “look through” tradable inflation. Treasury has already given it permission to do so.
Growth is the primary challenge ahead for Australia, not inflation.
