One of the key lessons from Philip Lowe’s period as Reserve Bank governor was to be careful that your messaging doesn’t create expectations you can’t or won’t want to meet. Whether newish governor Michele Bullock learnt that lesson as deputy to Lowe isn’t at all clear.
Four times this month she has emphasised the policy primacy of the central bank’s role of controlling prices by putting up interest rates if it feels inflation was proving to be tough to reduce. Not employment. Not financial stability. Inflation.
Less than a day before the release at 11.30am yesterday of the consumer price index (CPI) for the September quarter and the CPI’s monthly indicator for September, Bullock explained that the bank had a “low tolerance” for inflation moving too slowly back to the RBA’s target band.
She’d also used the phrase in the minutes of the October 3 board meeting, released last week. And in a bizarrely named “fireside chat” (“governor, you are no president Roosevelt”) a week ago at a finance conference, Bullock also talked about how “sticky” inflation was, as part of an extended discussion that mentioned inflation more than 40 times and jobs, well, not at all, except to comment that we still had a tight labour market.
In the actual statement from the October 3 decision to hold rates, Bullock emphasised that inflation was still too high and that if it didn’t seem to be coming down fast enough, the RBA would raise rates.
Bullock has thus cast herself as an inflation hawk — which is music to the ears of the inflation vultures and pet shop galahs of the financial markets and The Australian Financial Review who are desperate to see interest rates and unemployment rise and workers impoverished with (yet more) real wage falls.
“Low tolerance” is an unusual phrase for a central banker. It’s always been assumed that the RBA (like all central banks) has always had a “low tolerance” for inflation. What’s that line in Oliver Stone’s Nixon? “Presidents don’t threaten. They don’t have to.” It’s taken as read that central bankers don’t have to explain that they have a low tolerance for inflation.
But in stating the obvious, in making a point of noting the unnecessary, in labouring the point, Bullock has painted herself into a corner: the yardstick for measuring the central bank’s performance must now be inflation. Anything other than a rapid return to 2-3% will reflect a too-large tolerance of inflation. Jobs, stability, prudential risk come second.
But despite the obsession of the business class and the commentariat with “sticky” inflation, a wage-price spiral and inflationary expectations, inflation at the moment is still being driven by supply-side problems and profiteering — something the RBA and its big business-dominated board appears to have a very great tolerance for indeed, to the extent of sticking its collective hands over its ears and yelling “Not listening! Not listening!” to the extensive evidence.
So after yesterday’s slightly higher-than-expected September quarter inflation data, the galahs and the vultures now expect an interest rate rise at the November meeting. According to market pundits, it’s odds-on that rates will rise. Why?
According to the Australian Bureau of Statistics, the CPI for the September quarter rose by 1.2% instead of the 1.1% rise expected by most economists. That saw the annual rate fall to 5.4% from 6% in the June quarter to be the lowest annual rate in 18 months. The closely watched measure of underlying inflation, the trimmed mean, increased by 1.2% in the quarter in the CPI, although the annual rate fell to 5.2%.
The culprits were higher petrol costs, higher electricity costs and higher rents.
Higher petrol costs are outside the control of anyone in Australia, especially while our politicians, with a few notable exceptions like Matt Kean, drag their feet on uptake of electric vehicles. As for rents, the RBA itself has done its bit there with rate rises, exacerbating generations of government inaction on new home building and affordable housing.
Higher electricity costs are the product of a decade of Coalition ineptitude and an anti-competitive energy market, but they were lower than otherwise because of government intervention — and increased rent subsidies also reduced the impact of rent rises. In childcare, prices actually fell because of government policies.
The line from the vultures and the galahs is that government intervention to reduce inflation is a big no-no, that it will just distort markets and reduce investment by reducing profits. Turns out, government intervention had a real impact in reducing inflation, and could have had even more if the Albanese government was more aggressive about enforcing competition and tightly regulating the monopolies, duopolies and oligopolies that dominate our major markets.
Maybe Bullock should be calling for more of that rather than pandering to the “rate rise looms” crowd and locking herself into rate rises that will do nothing but punish Australians.
Not happy that we have an economic system that says we have to destroy millions of peoples lives to make a few billionaires comfortable. Or that we have politicians that are happy to swallow that unchewed. Pretty angry in fact.
If the RBA had a car with wonky steering, they would try to fix the problem by fiddling with the back wheels.
At an apparently long forgotten point in our history we were taught that inflation was caused by excessive workers’ wages and excess demand for goods and services. But history moves on, sometimes leaving people behind. They suffer cognitive dissonance if the economy starts to behave in ways not prescribed by academic experts. I think that has happened to Bullock.
The current inflation is caused by businesses putting their prices up and rises in fuel and power. That has dried up any excessive demand. However the Reserve bank only has one tool in its toolbox and that is to further restrict the spending power of those with mortgages as though that will fix the problem. It will not. The authors are right when they point to an anti-competitive energy market, government inaction on affordable housing and a lack of competition.
This one tool in the toolbox is annoying me no end. The RBA has other tools. It could work more closely with the Government to get fiscal-monetary policy aligned. The “independence” of the RBA is simply an excuse for the Government to do sweet FA. The RBA flatly refuses to acknowledge the impact of price gouging/profiteering on inflation — “our models/analysis do not show any connection…” — what other nonsense. Why further punish consumers who are already being punished at the fuel bowser? Consumption is not driving inflation. External events are. So why use your stupid tool to try to fix issues arising from global conflict? The RBA does not impress me. Economists generally do not impress me. They reduce society into dollar terms. They are narrow-minded, conservative, and evil, in my opinion. They worship their spreadsheets and have no clue about humanity.
Nowadays our working age cohort 20-64 in the permanent population is in decline vs. more retirees, as boomers transition to retirement; suggests there is much spending in the retiree cohort with first of the ‘super’ pot generations transitioning, a veritable flood of money….
You think that because one group, by age, has enetered the super pot is causing inflation? How much do you think they have in their super pot that allows them to spend so much of it so early in their retirement? Are they not affectec by fuel rises, price gouging in food, electricity, gas and everything every damn where you look?
I had just begun to becable to save a little but not now, I’m scrimping like everyone else, so ease up on the retirees are the cause of everything mantra and check up on the one percent who are still able to stash money offshore and spend on luxury items, flights and holidays, as well as running gas guzzlers – they are the ones who can afford rate rises because their homes ate well and truly paid for, no mortgages for them.
https://www.abc.net.au/news/2023-05-17/cba-report-under-35s-cutting-back-older-spending-inflation/102352156
I’m not talking about you specifically….(and others who can afford Crikey subscriptions), but broader cohorts; boomers can be divided into their below median boomer age i.e. 60-70 years of age, many have benefited from super (esp public servants), though not all.
However, over the next decade the remains of the boomers will be passing through with increasing super balances inc. private sector etc. careers and accumulating super, to splash.
Actually my power bill dropped this quarter. The fuel price gouge is still on, with the illustrated Amplify from the previous article the most expensive by a mile where I live. There are other factors in the rort too though. The price of beef and lamb have both plummeted at the farm gate. We are not talking small bikkies here either. Both are down by a good fifty percent. Not so the supermarket scum. There is still considerable gouging going on I think, but the economists mostly think business doesn’t do that.
The economists think that people who saved money during the Pandemic are now spending too lavishly. I am unsure how this saving happened as Australian households are highly indebted by global standards. Are we suddenly spending like mad? I doubt it. Perhaps the government giving instant trade write-offs has contributed to inflation? Many tradies seem to be able to afford monster SUVs or 4WD utes (like you need a 4WD double cab to ply your trade). I reckon the fossil fuel and supermarket giants drive much of the inflation and a sector of Australian society that is cashed-up, self-centered, and super-materialistic. Increasing GST on non-essential/luxury items would tame some consumerism and help reduce inflation. And yes, a 4WD ute or massive SUV is a luxury item. As I said, the government is too pathetic to raise taxes rather leaving the RBA to fight inflation alone. Taxes means losing votes, letting the RBA fight alone means less votes lost.
Mine did too! It was half compared to the same quarter last year!
There is always a ‘cost of living crisis’, or ‘govt. debt crisis’ no doubt requiring tax cuts for the higher income cohorts….
“One of the key lessons from Philip Lowe’s period as Reserve Bank governor was to be careful that your messaging doesn’t create expectations you can’t or won’t want to meet.”
Huh!? One of the key lessons from Phil Lowe’s period as Reserve Bank Governor was to not trust economists, not trust Reserve Bank Governors, not trust Reserve Bank Board members, rather to disband the Reserve Bank Board and replace it with people with more practical, real life and varied knowledge than the Economics 101 tripe they keep trotting out. “Managing expectations” is what con men do. Do we think we have shifted the paradigm by appointing a con lady?
“Bullock has thus cast herself as an inflation hawk — which is music to the ears of the inflation vultures and pet shop galahs of the financial markets and The Australian Financial Review who are desperate to see interest rates and unemployment rise and workers impoverished with (yet more) real wage falls.”
The Australian Financial Review. Where the only good worker is a dead one.