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."

Saturday, October 29, 2011

How can you cut interest rates on these data? (Charts)

David Uren has a very odd article in The Australian today calling for a rate cut and criticising the RBA for apparently getting the inflation outlook wrong. Hmmmm. This is what he says:

"Then the Australian Bureau of Statistics dropped a bombshell. It had given the June quarter inflation figures a second look and found that, adjusting for seasonal variations, prices had risen by a more acceptable 0.6 per cent, not 0.9 per cent. In July the jobless rate started rising."

A normally very thorough journalist, David has for some reason overlooked the fact that this "bombshell" has proven to be a mistake. After revising the Q2 core CPI figures down from 0.9% to 0.6%--a move that has attracted so much attention--the ABS has revised them back UP to 0.8% (annualising over 3%). So the latest, revised core inflation track in Australia looks like this.

Given the very volatile inflation data (noting that Q4 2010 was originally reported at 0.4%, then 0.5% and now 0.6%), it is hard to see how the RBA could be convinced of the need to cut rates, which, I will add, is still my "base-case" on Tuesday, given only one low Q3 print, which may be revised, contextualised against a clearly rising inflation pulse. Further, we know that the CPI ex volatiles rose 0.8% in Q3 while the new "seasonally-adjusted" headline CPI was clearly heading in a worrying direction (with Q1 affected by the floods).

The final two points concern domestic demand and the labour market. Domestic demand has been recovering healthily over 2011, as the first chart below shows. The second chart demonstrates that the number of short-term job seekers on unemployment benefits has been falling solidly in absolute terms, while more sharply as a share of the growing labour market.

A rate cut on Tuesday would be a purely political decision that cannot be justified by any credible analysis of the inflation outlook in the RBA's long-held "base-case". A soft-patch in the domestic data flows in Q2 care of a sequence of extraordinary global crises (nevertheless refuted by Q2 GDP), combined with one low inflation number, does not a game-changing view make.

And it hardly represents the policy of least regret if, in January, Q3 gets revised up and Q4 prints on the high-side. The RBA will look like it bowed to community and political pressure to drop its unwavering focus on price stability on the back of one quarter worth of data. I expect them to go, but I don't personally believe it is the right policy decision.