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Monday, April 30, 2012
Adam Carr goes to war
In talking about the RBA’s meeting this week (decision due Tuesday at 1430 AEST) and beyond, there are a couple of ways I could approach those CPI numbers that we saw last week. I could of course take the path that many others choose – especially the growing army of pseudo-economists and ALP propagandists in the blogosphere (the day of electoral annihilation is near at hand). But using double speak, dismissing facts and spinning lies, as well worn as that path is at the moment, isn’t my thing – no need. The CPI was high and the genie is out of the bottle! But of course it wasn’t and the only people who are fooled by such tactics are those who use them.
Inflation is certainly lower than expected, and that has all manner of people writhing in glee about just how weak the economy must be. We ARE in a recession – see, I told you! Low inflation proves it! Unfortunately, and I do hate to cut the schadenfreude short, these views are based on a seriously flawed understanding of economics. The latest first quarter CPI numbers only confirm what I pointed out after the fourth quarter numbers – and that is that the factors that are dampening inflation are all temporary.
By now you know the drill. Lower inflation is literally due to currency impacts and food. In the absence of the correction from the floods – which is a supply side phenomenon – and the extraordinary falls in some currency sensitive areas, CPI was up 0.8 per cent, non-tradeable up 1 per cent (around 4 per cent annually). This acceleration in demand induced inflation is entirely consistent with domestic demand growth at its strongest in four years and an unemployment rate around 5.2 per cent. All the data is consistent. Overall CPI is low, sure, and on my estimates, true underlying inflation is running at 2.5 per cent (I’m not referring to the ABS’s measures here). This is a good outcome, but there is nothing in these estimates that should encourage complacency when the risks around the growth are to the upside and evenly balanced with regards to CPI – especially when the modest inflation now is largely due to supply side factors (heavy rainfall, changes in technology and the high Australian dollar).
This is a reasonable observation to make. Almost without exception price falls, or at least the magnitude of them were unusual, but they are temporary. On the flipside price gains were not unusual – they were very normal. So unless you think the exchange rate will continue to rise at about 5-10 per cent per quarter, then this impact will wane. Also consider that it is highly unlikely that fruit prices will continue to fall by 30 per cent per quarter. In contrast pharmaceuticals will continue to rise by 10-15 per cent, education by 5-7 per cent, rent by at least 4 per cent per year, etc. Non-tradeable prices, remember, accelerated in the quarter, rising 1 per cent – they are up nearly 4 per cent for the year. There is no disinflation here. Consequently it is disingenuous for anyone to claim that underlying inflation pressures have eased materially when clearly they have not. When lower CPI is due to only a few components, no broad based move.