Earlier this morning brought news which posed a few questions about economic policy. It came from a land down under where if people were willing to move their eyes from the Australian Open tennis there was this to mull.
The Consumer Price Index (CPI) rose 1.9 per cent in the December 2022 quarter and 7.8 per cent annually, according to the latest data from the Australian Bureau of Statistics (ABS).
It pretty much goes without saying these days that the forecasts were wrong but they were too low so something of a cosy consensus was replaced by this.
Michelle Marquardt, ABS head of prices statistics, said “This is the fourth consecutive quarter to show a rise greater than any seen since the introduction of the Goods and Services Tax (GST) in 2000. The increase for the quarter was slightly higher than the quarterly movements for the September and June quarters last year (both 1.8 per cent).”
So the inflationary push continued in broad terms and in fact picked up slightly. If we look back and ignore the tax change there has not been anything like this since December 1990’s figures. That means that the era of technocratic independent central banks is doing worse than the system it was supposed to replace. There will be some itchy shirt collars at the Reserve Bank of Australia this morning as they have already had to issue one apology. From the Australian Parliament last November.
Senator McKim: Do you accept that you did in fact induce Australians to take out mortgages on the basis that interest rates wouldn’t rise until 2024? And do you think you owe those people an apology?
RBA Governor Dr Lowe : Well, I’m certainly sorry if people listened to what we’d said and then acted on what we’d said and now regret what they had done. That’s regrettable. I’m sorry that happened.
This is a significant issue because the whole point about Forward Guidance was that it was supposed to change people’s behaviour. Now when it is clear some did as they were effectively told it is a bit rich for Governor Lowe to mention caveats as he sings along with Luther Vandross.
I told my girl bye-bye (bye)And I really didn’t mean itSaid I met somebody new so fine (fine)And I really didn’t mean it
I will return to the RBA but let us first return to the details of the inflation numbers.#
Breaking it Down
One clear influence was that Australian’s were particularly keen to go on holiday and travel.
The most significant contributors to the rise in the December quarter were Domestic holiday travel and accommodation (+13.3 per cent), Electricity (+8.6 per cent), and International holiday travel and accommodation (+7.6 per cent).
“Strong demand, particularly over the Christmas holiday period, contributed to price rises for domestic holiday travel and international airfares,” Ms Marquardt said.
“The rises seen for domestic and international travel were notably higher than historical December quarter movements.”
Higher electricity prices are only a surprise in that in international terms the rises are not that high. Although it was the unwinding of subsidies that were the main influence and I note Western Australia had a different treatment to the £400 credit in the UK.
“The main factor influencing the rise in electricity prices was the unwinding of the $400 electricity credit offered by the Western Australian Government to all households last quarter. This was partially offset by the ongoing impact of the Queensland Government’s $175 Cost of Living rebate from September 2022, and the introduction of the Tasmanian Government’s $119 Winter Bill Buster electricity discount for concession households.”
We see that the march of basic products continued although there was some relief cia vegetables.
Food prices continued to rise, driven by Meals out and takeaway foods (+2.1 per cent) as dining establishments pass through rising costs for inputs including ingredients and labour. Vegetables (-10.2 per cent) partially offset the rise, as the effects of unfavourable weather earlier in the year eased.
There will as 2023 progresses be some relief to be found in the area below.
Growth in prices for New dwellings (+1.7 per cent) slowed relative to recent quarters (+3.7 per cent in September and +5.6 per cent in June) but remained stronger than historic norms.
“Labour and material costs are driving price growth in this area, with signs of material cost pressures easing,” Ms Marquardt said.
“Slowing demand for new dwelling construction was reflected in a lower quarterly rate of inflation for new dwellings this quarter compared with the past five quarters”.
On the other side of the coin I would be embarrassed to emphasise claims about “temporary” inflation changes after the disasters in this area over the past 18 months.
Underlying inflation measures reduce the impact of irregular or temporary price changes in the CPI. For the third consecutive quarter, annual trimmed mean inflation was the highest since the series commenced in 2003, increasing to 6.9 per cent, up from 6.1 per cent in the September quarter.
There is a relatively new monthly series and as you can see it just reinforced the troubling theme here.
Today the ABS also released the monthly CPI indicator for December. The monthly indicator rose 8.4 per cent in the 12 months to December, following annual rises of 7.3 per cent in November and 6.9 per cent in October.
Comment
The Reserve Bank of Australia finds itself in quite a pickle as it mulls the central banking equivalent of original sin. When to quote the famous phrase “the party got going” rather than taking away the punch bowl it continued with this.
But if I can just take you back to the situation we were facing in 2020 and 2021, the country was in a dire situation. At the Reserve Bank we wanted to do everything we could to help the country get through that. We also had a strong insurance mindset. We were thinking, ‘What could go wrong here?’ And the thing that could wrong was really, really bad. We were talking about 15 per cent unemployment, a generation of young kids not being able to find jobs, people not being able to go to school and university. It was a dire time.
That was Governor Lowe in Parliament last November. If we fast forward to now we can see what he has given them. We know know that inflation at the end of the year was of the order of 8% and the RBA thinks wage growth is this.
The Wage Price Index had increased by 1 per cent in the September quarter, to be 3.1 per cent higher over the year, slightly above the Bank’s forecast in November……….A range of more timely measures – such as recently lodged enterprise agreements and information from the Bank’s liaison – indicated that wages growth had continued to pick up in the December quarter.
Even if it rose to 4% then real wages were falling at an annual rate of around 4%. That is the problem for central bankers who have “saved us” by hammering real wages. Even worse they continue this illusion by talking of “Tight labour market conditions” when real wages tell a different story.
On the other side of the coin they pumped up asset prices leaving themselves with a loss and asset holders with large profits.
As a result, the Bank has recorded an accounting loss of $36.7 billion this year, which has reduced its equity to negative $12.4 billion.
Equity is no big deal when you are the currency creator. But will this piece of Forward Guidance be filed with the last one?
The Board expects that the Bank’s capital will be restored over time due to positive underlying earnings and capital gains when bonds mature.
They highlighted the 3 year yield as part of their Yield Curve Control. They drove prices extremely high ( yields approached 0%) and now they are a bit over 3%. That is a recipe for further losses not gains especially as its own funding rate is now 3.1%.