Since the inflation targeting framework was formally agreed in 1996, average annual headline inflation has been 2.7% pa. The two other measures of inflation the RBA uses, the trimmed mean and weighted median, have also averaged 2.7% pa.
What is much more worrying is that all these measures of inflation have been drifting up since the mid 2000s. Indeed, headline inflation has averaged 3.0% pa during Glenn Stevens' term while the preferred 'core inflation' measures have averaged 3.4% to 3.5% pa since Stevens was appointed.
Even according to the RBA's own forecasts, we are meant to be at or near the inflationary nadir in this cycle yet both the headline and core measures of inflation printed at 3.1% and 2.7%, respectively, in the last quarter. So if inflation pressures are meant to start emerging again, how does the RBA have any hope of getting any of its inflation benchmarks near the 2.5% pa target on a through-the-cycle basis?
Given the RBA targets medium term inflation, I have constructed 2, 3 and 4 year moving averages of the annual inflation rate in the following charts. The first two charts show the headline CPI and the trimmed mean CPI since March 1996. Both are sitting near or well above the RBA's maximum acceptable target of 3% pa. The next two charts look at these measures since Glenn Stevens was appointed in September 2006. You get the picture...
