All eyes will be on the RBA’s February board meeting tomorrow to see how it responds both to last week’s Consumer Price Index (CPI) figures and the US Federal Reserve’s commitment to hiking interest rates in coming months.
But the challenge for the central bank is how it will tackle inflation when some of the key drivers are outside the scope of monetary policy.
The December quarter CPI rose 1.3% to be up 3.5% over the year. The trimmed mean figure used by the RBA rose an annual 2.6%, above the central bank’s forecast for a 2.25% rise at the end of 2021. But if you examine the components of the rise, you’ll see the RBA can’t do very much.
There was a 4.2% rise in new dwelling purchase costs for home buyers and a 6.6% jump in petrol prices, followed by a 6.5% rise in childcare costs. Food and non-alcoholic beverages increased 0.7%, with clothing and footwear up 2.6%. Petrol prices rose 32.3% over the course of 2021.
There’s more pain from petrol prices to come: oil prices hit new seven year plus highs on Friday with Brent crude, the global marker, back above US$90 a barrel — the highest since late 2014. The price is going to rise further given the continuing tension between Russia, Ukraine, the US, and Europe. And the Putin regime is a major beneficiary of the price spike given its energy exports.
According to the Bureau of Statistics (ABS), Australians spend around $2300 a year on petrol which accounts for 3.3% of the CPI basket. That’s likely down at the moment due to the Omicron shadow lockdown and the persistence of working from home, but it means the volatile commodity has a significant impact on overall CPI.
It also means we have a two-speed economy in terms of inflation: the goods economy is beset by inflation, while the service economy remains subdued: according to the ABS, goods price inflation was 4.3% over 2021 against a rise of 2.3% in services (even including the big rise in childcare costs). That will also weigh on the RBA’s thinking.
In the US, where inflation has hit 7%, the Federal Reserve last week signalled, via chairman Jerome Powell, that it “is of a mind to raise the federal funds rate at the March meeting assuming that conditions are appropriate for doing so”, indicating the era of zero-cost money is over.
But a rate rise or three from the RBA will do nothing to reduce energy prices, given we’re a price taker in the global energy market. Cost pressures are coming less from a hot or overheating economy (except in housing, and that’s softening as we speak) than from input costs.
The RBA will not raise rates at tomorrow’s meeting, but it will tighten monetary policy by confirming the end of its $4 billion a week of bond buying or quantitative easing. It will also release its February Statement of Monetary Policy with updated forecasts on Friday, to which tomorrow’s post-meeting statement from governor Philip Lowe will look forward.
While other indicators will be upgraded on Friday, subdued wage growth remains the big worry for the central bank. A key item to watch in Lowe’s statement, and his Wednesday speech to the National Press Club, will be whether the RBA holds onto the view, previously strongly expressed, that they won’t move on the increasing the cash rate until wage growth sees sustained acceleration to and beyond 3%.
However, if there is a war in Ukraine, or some other crisis drives oil up into three figures, the RBA will find itself in an increasingly difficult position of knowing it has to respond to surging inflation, but with little alternative but to smother the rest of the economy with higher interest rates despite their doing nothing about the real cause.
The only positive in that scenario is that Xi Jinping in China has a vested economic interest in western countries keeping inflation low, so has a disincentive to exploit any conflict between Russia and NATO. But China, like the rest of us, is a price taker on energy.
If only there was a way of weaning ourselves off oil in our transport sector… or, at least, a government willing to embrace one.
I reckon within five years I’ll have a cheap 10 KW.battery system to back up my existing solar panels. That , together with my EV and e-bike will put me almost entirely off grid and screw the govt and their cosy deals with energy corps.
EV sales in China and Europe are accelerating quickly, and they will in Oz when we have affordable electric cars by 2025 and a government that sees further than the next coal mine.
♪♪Somewhere, over the Rainbow, strictly informal coalition supporting ‘Labor’ government♪♪, with apologies Dorothy & Harburg & Arlen.
There certainly are ways to wean ourselves off oil in our transport sector. Whereas big-city commuters can use EV’s, our trucks, ships and planes need synthetic fuel. Recycling atmospheric CO2 into liquid hydrocarbons requires massive supplies of non-fossil energy. But no Party promises that supply. Our ongoing failure, of both Right and Left, to commit to the complete replacement of all fossil fuels will condemn us in the eyes of our survivors. (No, adding wind-and-gas will never eliminate coal-and-gas, it is total, not token replacement required.)
Beg to differ. There are several trucking manufacturers about to release 40 ton semis. The CSIRO has developed a gismo that will convert ammonia to hydrogen on demand thus making it viable for use in avionics, shipping and road transport. Solid state hydrogen also shows great promise in trucking and car industries. These are not pie in the sky developments but out of the laboratory products looking for markets
About to release electric 40 ton semis…
I cannot see the logic in increasing interest rates because the price of goods has increased. Increasing interest rates is not going to dampen the price of oil or other goods.
Frank ultra low interest rates favour the well off as they have access to funds to invest. At the moment you can borrow at about zero or a bit more and invest in the stock market or a house and make good money. A poor person cant do that as they don’t have access to funds. Also low interest rates help lower the aussie dollar, they will have to lift the interest rates to protect the dollar as we import inflation. This stuff is counter intuitive. The (MMT) money printing was sold to us that it would not cause inflation, that was bad economics, as inflation is surging no matter how they define it. Plenty of money and low interest rates – equals inflation, always has and always will, that’s how it goes in the real world.
Hydrogen will be difficult because the greens love Elon Musk and one can never debate with a green, they are unilateral and have a closed mind. We are used to the convenience of cars so trains and public transport are only window dressing.
Be careful with replacements and renewables in the UK they stopped burning coal and replaced it with biomass, ( wood chip and trees) ever wonder why timber is so expensive now, and mdf and chipboard. Have a look at the bbc website look up biomass. Thr carbon debit is left in the usa and the UK burns it with the assumption there is no greenhouse gas emissions.
So the UK plant is carbon free. https://www.bbc.co.uk/search?q=biomass&page=1 there are few articles but my first line holds up
maybe the 50 percent fuel excise is part of the problem, and excise on alcohol and the like