The June inflation rate of 3.8% ended any real prospect of a rate rise next month, despite investors assuming the Reserve Bank would rather raise rates than not.
There is a certain ghoulishness when it comes to economics and especially inflation. A “good” number will inevitably be dull news, whereas a bad number – one that is higher than expected or just higher – can lead to all manner of gnashing of teeth and wailing as the topic quickly shifts to interest rates.
The linking of things to interest rates is not limited to inflation.
Last week the June unemployment figures notionally showed unemployment had remained steady at 4.4% but when you scrapped back some of the rounding, it actually rose from 3.37% to 3.43%:
The underemployment rate rose from 6.3% to 6.5%, which meant that the underutilisation rate – the total percentage of people in the labour force looking for a job or for more hours – rose rather steeply from 10.7% to 10.9%
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Like a naive fool I suspected this would mean the likelihood of an interest rate rise would perhaps fade. After all, only a very silly person would want to raise rates and thus slow the economy even more when unemployment and underemployment were both rising. Why seek to make things worse?
And then investors went from betting that the odds of a rate rise next month were a 19% chance to a 37% chance and then the following day to a 47% one.
What the hell?
This was all based on people noting that June employment grew solidly.
Well, great, but so did unemployment and underemployment.
Seriously what are we doing here?
It was a reflection that we know the RBA is pretty desperate to raise rates again. All the talk from the RBA has been how carefully they are looking for any signs that will require them to act to lower inflation.
And if that means raising them just because employment grew, well so be it, because heck those workers might want a higher wage and surely the wage-price spiral is due to come any day now!
Thankfully, it seemed people regained some sense of reality and the likelihood of a rate rise had fallen to 19% by Tuesday.
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And now that inflation in the year to June has come in at 3.8% – lower than expected and down from 4.0% in May – the expectations of a rate rise have crashed to just 3%:
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All that talk of a rate rise in August because Trump was being insane in Iran and raising oil prices and too many people had jobs rather dissipated as the reality of the economy not overheating and prices not being driven by excess demand withered.
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So what happened in June?
The biggest fall was petrol prices.
Oil prices had fallen in the month as the Iran conflict seemed to be working towards some sort of conclusion:
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As a result, petrol prices fell nearly 11% in the month:
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But in the July figures petrol prices will have increased about 5%-6% due to higher oil prices and the reduction in the government’s cut to the fuel excise.
The biggest cause of inflation over the past year was electricity prices.
But this is purely due to the federal and state energy subsidies still being in place a year ago. The impact of these will largely exit the figures in next month’s numbers, which should lead to a lower overall inflation figure – especially as a full half of a per cent of the 3.8% is due to that electricity price jump:
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The numbers also highlight how people’s experience of the cost-of-living crisis probably does not match the official inflation numbers.
For example, in the past year the cost of lamb rose 15%, beef was up 12% and tea and coffee prices rose 5.1%.
Telling someone whose most regular interaction with prices (namely groceries) that inflation is slowing and was just 3.8% would probably trigger a puzzled look (if not a hollow laugh):
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That doesn’t mean the figures are wrong, just that while the CPI is weighted to get an average of how much Australian households spend on each item every week, people are less likely to weight the fact that over the past year the price of motor vehicles was less than 3.8% or that the price of eggs fell 5.4%:
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More likely they remember that while eggs might be cheaper than they were 12 months ago, they are still more expensive than they were 18 months ago.
Also remember that the inflation figures don’t count the cost of home loan repayments, which have risen in the past few months. Those repayments are included in the cost-of-living figures that will be out next week.
For now, the market sees no rate rise next month but the prospect of one to come later remains:
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Mostly what these inflation figures have done is put off the expectation of another rate rise till early next year, rather than in November.
But that rise continues to loom as we return to the ghoulish practice of looking for any excuse the RBA might find in order to raise the cash rate.
