Economists call for RBA to lower inflation target

A growing number of economists have called on the Reserve Bank of Australia (RBA) to lower its inflation target from 2% to 3%, in order to bring it into line with global peers:

Yarra Capital Management macro and strategy chief Tom Toohey said: “The RBA remains in the unenviable position of not being able to meet its legislated inflation target for a record 45 straight months.”

He says evidence suggests the current range is too high, and says Britain, the US, and Canada all have a 2 per cent target…

David Bassanese of BetaShares said: “I think the RBA is fighting the last war in trying to get inflation up and is risking financial excess with persistent low interest rates.

Mr Bassanese says the RBA should adopt an inflation target of between 1 and 3 per cent to provide it greater flexibility in monetary policy…

Warren Hogan nominated 1 to 3 per cent, Nomura’s Andrew Ticehurst “around” 2 per cent, and Capital Economics’s Marcel Thieliant 2 per cent.

Any lowering of the inflation target should be accompanied by changes to the RBA’s mandate to explicitly target underemployment (rather than employment), given underemployment is the number one driver of wage growth and ergo inflation.

The RBA also needs to better integrate the cash rate with macroprudential policy in order to prevent rate cuts from blowing asset (housing) bubbles.

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Comments

    • The ABS publishes it here. It includes what the CPI is composed of and how much weight it carries (and also how it has changed):
      https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/6470.0.55.0022019?OpenDocument

      The actual CPI data is published at this finer level in Table 7 of the CPI:
      https://www.abs.gov.au/ausstats/meisubs.nsf/log?openagent&640105.xls&6401.0&Time%20Series%20Spreadsheet&540C74E0809C3EF2CA2584A20012CD99&0&Sep%202019&30.10.2019&Latest

      • The CPI has an sub-item specifically for housing purchases –> “New dwelling purchase by owner-occupiers”. It contributes about 7-8% of the CPI.

        The problem with this figure is that it really only measures the cost of materials and construction etc, but doesn’t include the price of land. Considering that land comprises 70-75% of the cost of housing, its omission is a problem.

        I believe that the solution to under-representation of housing in the CPI is to include an additional item for *Imputed Rents* paid by owner occupiers. These Imputed Rents are included in the GDP figures, alongside actual rent paid, but are omitted from CPI. It’s a mistake that the ABS needs to address.

    • Jumping jack flash

      the baskets are finely tuned and expertly composed and weighted so the result will always be in the general vicinity of what is expected and required.

      Far too many things still rely on the current rate target.
      To mess with the inflation rate target could mean that some things would need to be decoupled from it, and certainly the baskets would need to be recomposed and rebalanced to be able to unfailingly achieve that new output regardless of the input.

      Basically, a lot of work for the work experience kids at the ABS.

  1. “A growing number of economists have called on the Reserve Bank of Australia (RBA) to lower its inflation target from 2% to 3%” – you mean from 3% to 2%?

  2. ChestinatorMEMBER

    Had a discussion with a work mate the other day regarding the tightening of bank lending criteria, IO loan reduction etc. He was adamant the powers that be were primarily trying to lower the cost of housing to improve affordability. As I understand it, they were just trying to ‘shore up’ the foundations so it doesn’t crumble and to provide a stable platform to launch it into the stratosphere. At no stage will the gov do anything to jeopardise house prices, no matter how good the decision is economically. Boomer/GenX are both too [email protected] deep in “good debt” to let this happen. This includes implementing smart preemptive macro prudential decisions for the good of future generations. I hope I’m wrong.

  3. “The RBA remains in the unenviable position of not being able to meet its legislated inflation target for a record 45 straight months.”

    Umm, it’s simply not possible for any central bank to ‘control’ inflation this precisely or even imprecisely. May as well bark at the moon.

    “… should be accompanied by changes to the RBA’s mandate to explicitly target underemployment …”

    Monetary policy cannot fix the problem of unemployment and definitely not under-employment. Under-employment, as this blog has alluded to on numerous occasions is a structural thing whose causes lie variously in high immigration and, more broadly, in a mixture of employment legislation. minimum wage levels etc.

    • Central bank trying to control inflation is pointless, central bank trying to control unemployment is pointless. Makes sense why the RBA does nothing then I suppose.

      • What causes an increase in inflation (CPI)? Demand for goods rising near to, or beyond Supply, demand hitting supply constraints.
        In the pre globalization past, this would commonly occur when the money supply increased via easy credit, more money, more purchasing pressure until supply constraints meant prices started to rise.
        In the current Globalization paradigm there is considerable excess manufacturing capacity in China, India, Vietnam Indonesia etc etc, increased demand from Australia is not going to push demand toward hitting supply constraints and thereby cause an increase in the cost of those goods.
        there is nothing the RBA can do to increase inflation in the basket of goods it measures, it CAN and Is however causing inflation in what it doesn’t measure, the things that cannot be manufactured overseas, housing, shares, fine art and collectables etc.
        And why do they desperately seek inflation and consequent wage growth? because it deflates the value of the debt mountain out there! 

        • Pretty much right on. And if you don’t give a tinker’s damn about the debt your country is in then you can import unlimited amounts of this cheap stuff. This controlling inflation stuff is easy!

    • Jumping jack flash

      Yes!

      Any control/improvement of inflation and employment that occurs as a result of cash rate movements is pure luck. The links are convoluted and precarious and cannot be used for control.

      This is why after they move the cash rate, the RBA board quickly forms a druid circle and performs various chants and sacrifices to improve inflation, wage inflation and unemployment.

      The reason is, of course, because interest rates are a symptom of an economy’s health. So you cannot simply change interest rates to what they would be if an economy was performing well and then sit back and wait for the economy to perform well. It just can’t work.

      If you carefully prepare the runway with enough flowers and fruits, wear the coconut headset, and dance and wave around your arms in the correct manner, then that cargo plane will surely materialise and land on the runway, bringing with it gifts and trinkets from afar.

  4. I’ve never understood the rationale for a 2 – 3 per cent target. In practice it works like a tax on the poor.

    • Panigale959gal Du

      It’s what is needed to keep the fiat money system going. If credit is not perpetually growing then old debt can’t be repaid and u get deflation and supposedly depression/recession. All bollocks of course but that’s what the econs will tell u.

    • I’m not sure of the literature, not that I could parse it anyway, but I read a comment from a fairly well know economist a number of years ago, where he state that it was a well established fact (i.e. shown by statistics) that this range of inflation produced the minimum amount of unemployment. I think the term is frictional rate of unemployment.

      • Having said that, it appears that the old rules don’t apply anymore, for when the unemployment rate falls, inflation does not pick up. This of course is by design, thus the target must now be lowered.

      • Also, it’s good when you’re measuring inflation on things that are not inflating, for the things that are inflating can inflate for a very long time and the plebs will be wondering why that cannot afford the things that are inflating, but blame it on the cost of everything else. Yes, they really are that smart.

  5. So inflation is a proxy for overall demand in the economy, I assume? ie, prices go up, so that means that there is a greater demand which means more goods are being bought which means more economic activity which means greater employment? Seems a bit clumsy. And how does supply come into the equation? If you are getting greater and greater supply due to increased productivity, then even if demand increases, prices should stabilise thereby muting inflation.

    • You can rig your currency so that you can always import more cheap goods! Inflation measurements are tiny artificial contrivances that should only be viewed through the prism of the overall balanced economy.

  6. If at first you cannot get what you want, lower your standards.
    But in all seriousness as others have commented above, the stated goal of the reserve bank is different to the actual goal. And it has been known for some time that speculators want booms and busts, because it’s difficult to speculate in a flat market. In a flat market you must find value to make a good return. Monetary policy is about pushing stock and asset prices higher. Surely the RBA are not that stupid that they think that this will not end badly. When the bust comes the same people who got in early and made money on the way up, will try and make money on the way down. Pity those who leveraged up late in the game and will not be informed when things are about to blow up.

    • “Surely the RBA are not that stupid that they think that this will not end badly.”
      If stupidity is the absence of any other viable alternative, then yes, they are.
      “We” have put ourselves into a position of no ( economically painless) escape. Hence ‘they’ continue with more of the same.
      You’ve hit on what the solution will be, though, and they all end with the word, badly.

    • So just to be a bit more clear and connect this to the comments I made above, AFAIK interest rates are to a certain extent set by inflation. So if you can goose inflation you can goose interest rates. The way to goose inflation is to
      1. Not measure it properly
      2. Reduce wage inflation by keeping slack in the labour market
      The trick here is the slack in the labour market is not visible according to the official statistics because of the way unemployment is measure and the fact that there is now a lot more underemployment. Thus the historical link between unemployment and inflation is broken.
      That’s my story and I’m sticking to it.

  7. James DaveyMEMBER

    The inflation target should be lowered. The only winner when there is inflation is the Govt as all it does is push workers into the next income tax bracket ie higher taxes. Hence, Govt’s do little more than create inflation.