RBA futures still see one more interest rate cut, but it’s six months away
Meanwhile, Bloxo leads off the rate hike hysteria.
Third-quarter inflation surprised sharply to the upside, and when a big surprise like this comes along, there are typically two possible responses.
One is to dismiss the data as statistical noise that will prove temporary. However, this is difficult to do on this occasion. The rise in inflation was broad-based, the upside surprise was substantial, and it affected all the key core measures designed to strip out the volatility.
About 50 per cent of inflation components rose by more than 3 per cent, the highest share in six quarters, and the trimmed mean – the RBA’s preferred measure – jumped to the top of the target band at 3 per cent year-on-year.
The other possible response is to try to explain why inflation has picked up more than expected
Of note, economic growth has been stronger than expected, lifting demand, which could be putting more upward pressure on inflation. However, as growth has been only a bit faster than the RBA’s forecast, it will be hard to argue that a surprisingly strong upswing in demand has been the driving force.
Instead, it probably refects the supply side of the economy being weaker than originally assumed.
For us, weak productivity holds the key. The last time the RBA published forecasts in August, it revised down its own working assumption for productivity growth, which is something the central bank does not do very often. It may turn out that its new, lower assumption is still too high.
The RBA is assuming productivity growth of 0.7 per cent a year, but the average over the past decade is just 0.1 per cent. HSBC’s working assumption is 0.4 per cent.
If it turns out that the rate of productivity is lower than previously thought, it means the potential growth rate for the economy – its “speed limit” – is lower as well.
This means that even the current pace of economic growth, with GDP rising by 1.8 per cent over the past year, might already be faster than the economy can sustain.
Jeez. This discussion is so textbook and so obscure relative to the actual Australian economy that it is irrelevant.
Over half of the September quarter CPI blowout was energy costs at 0.68 of 1.03%. Sure, you trim it out, but that does not account for the cost-push inflation impact it is having on every single business east of WA.
Arguably, that is the other half! Energy inflation is everything inflation.
Year-to-date energy inflation is 37% as the Ukraine War gas and power shock rebates roll off. By the time the post-rebate reversion is done, it will be closer to 50%. Again, arguably, you can double it with spillovers.
Australia does not have supply-side constraints except in the suicidal embrace of unfettered gas exports.
- In the past 5 years, the Australian government has allowed the export of gas volumes equivalent to 22 years of Australia’s total gas demand.
- The gas industry uses more gas just processing gas for export than Australians use for gas power plants, manufacturing or households.
- Gas exports use:
- 9 times more gas than Australia uses for electricity each year.
- 13 times more gas than Australia’s entire manufacturing industry each year.
- 30 times more than all of the gas used by Australian households each year.
- In 2023-24, 83% of all natural gas extracted in Australia was used by the LNG export industry.
- Gas exports have caused east coast wholesale gas prices to triple.
- Australians pay 4-7 times more for gas than other large gas producing nations including the USA, Russia, Qatar and Canada.
The corrupt RBA refuses to tackle this subject because it might upset its Canberra master. Instead, it waffles on endlessly about productivity and unit labour costs, which are irrelevant. These are symptoms not cause.
Index-hugging economists follow in its wake.
The notion that Australia’s immigration-led economy has labour shortage is a farce. 50 million unemployed Indians are trying to come here as we speak. Albo is letting them in at record speed.
Sure, there are labour mismatches, but not enough to lift wage growth over the cycle, which is why it is falling away while inflation spikes.
The problem is energy. More particularly, the problem is gas, which sets the marginal cost of power.
Fix that and you fix everything: productivity rises, inflation collapses and growth legs up.
