The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Sunday, July 25, 2010

Just to throw a spanner in the works apropos inflation...

Another thing very few folks are talking about is the risk of a low CPI print. Everyone has their heart set on +0.7% to +0.9% outcomes for the core measures. Matthew Johnson at UBS figures that the RBA are forecasting a 0.55% core CPI print in Q2. He also reckons that the average RBA forecast error is +0.15%, which gives us a nice 0.7% result. But the RBA forecast error looks to have been smaller in recent quarters, and you would like to think that they have adapted their expectations (ie, they are getting a handle on their "under-clubbing" problem, as NAB's Peter Jolly describes it). Matthew shows that there is also partial data to suggest that the breadth of inflation, which is crucial for the core indicators, has been declining, not rising, over time. Combined with the absence of some factors driving up the core in Q1, this implies that there may be higher probabilities of a lower, rather than larger, CPI print in Q2. Of course, it is much more interesting to talk about what happens if the core comes out at 0.8%, in which case I am thinking the RBA will have little choice but to hike. While I am on this topic, I wish economists would publish the errors associated with their forecasts and provide us with probability distributions. Quoting a single forecast statistic implies a much higher degree of confidence for lay punters than is actually warranted. This is actually something regulators could insist on.