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."

Friday, April 15, 2011

Good and bad news for RBA on consumer inflation expectations...

So, the good news is that Australian consumer inflation expectations have not increased in April. The bad news is that they have not really fallen either, printing 3.5% in April vs. 3.6% in March according to Westpac-Melbourne Institute (the two numbers are statistically indistinguishable).

The worse news is that consumer inflation expectations have averaged 3.1% since 1993, so current levels are elevated despite relatively benign core and headline inflation prints over the last year. Clearly, the floods and petrol prices have had an impact. The first chart below shows the monthly Westpac-MI survey data with a moving average (green line) since 1993. As you can see, the RBA has not been successful in keeping a lid on consumer inflation expectations since adopting its inflation targeting regime in 1993 (click to enlarge).

The following charts illustrate Westpac's always useful parsing of the data. The really worrying thing about consumer inflation expectations is that they are already elevated at what is expected to be the beginning of a prolonged boom. At a time when the labour market is fully employed. At a time when the wage cost index is growing at pre-GFC levels. At a time when the currency is likely to depreciate (over a 12-18mth horizon) as US yields inevitably rise. At a time when there is an exceedingly strong inflationary impulse in China (ie, rising wage costs), which Australia almost certainly risks importing. And at a time when the world is enduring a range of supply shocks--to oil and food, in particular--which are generating cost-push pressures.