Date: 31 July 2023
It is rare that discussion about the economy does not percolate into near every conversation. The last month, the topic has been inflation and interest rates, with the nation hoping desperately that pesky inflation numbers would fall for the June quarter, providing some prospect of relief from continued interest rate rises. Tick that box!
It now appears certain inflation peaked in the December quarter of 2022 when it clocked 7.8% on an annualised basis, before falling away to be 6.0% year-ended June 2023. The latest quarterly result saw a rise of just 0.8%, compared with 1.4% in the March quarter.
On a quarterly basis, all major expenditure categories were lower, with the exception of tradeables, or the goods and services we import and discretionary items.
The rise in tradeables probably reflects a lower trade weighted exchange rate, which itself arises because Australia has interest rates relative to some other jurisdictions, especially the USA.
Discretionary items are a bit more of a surprise because a lot of spending capacity has been withdrawn from the economy by the interest rate rises, so items we literally do not need in order to survive should be first to come down. Unless, as may have been the case, there was a new iPhone release, or similar ‘event’ to see the populous jettison its discretion.
That is a cheap view of the national psyche however, and what is more likely is that with the prices of travel and holidays rising significantly, perhaps this is the built-up cash finally being spent because it could not be spent over the last two or three years. Perhaps new wellbeing reporting in the national accounts will allow for some consideration of the importance of holidays and similar items that sees them become necessities, not treated as discretionary?
Those are the headlines, but as every casual economist knows, the measures of underlying inflation are where the Reserve Bank of Australia (RBA) pays its greatest attention when it is considering interest rate rises. All were lower, even those that have a lag in them, suggesting the deterioration of prices growth has been in train for most of 2023.
Significantly, the annual trimmed mean inflation measure – which excludes most volatile price changes that are external to the control of businesses and consumers (like fuel costs for instance) – was 5.9% over the twelve months to June and down from 6.6% in the March quarter.
This positive data on inflation, combined with strong labour market (reported elsewhere in Statistics Count) means the often quoted “narrow path to a soft landing” may have just got wider. That is, it seems more likely Australia will be able to curb inflation at a rate and in a manner that doesn’t drive the economy backwards and create a spike in unemployment that would undermine the gains of low unemployment which have been made post COVID.
More will be known at the next RBA Board meeting which will be held on 1st August. There, the RBA will consider whether to slam the brakes on the economy with a further interest rate rise – the effect of which would not be felt until say early 2024 – or to ease off and allow the economy to gradually correct back to normal inflation.
Meantime, in addition to the positive Australian news, the results in the US have been even more remarkable, with headline inflation in June down to 3.0%, the lowest rate in 2 years.
If that trend continues, some commentators suggest the US Federal Reserve will have pulled off the impossible by creating “immaculate disinflation” which is a normalisation of inflation without a big jump in unemployment or major contraction of the economy.
As Jonathan Shapiro reported in the AFR in July, global funds manager Pimco suggested around the world, the cycle of interest rate rises is near its end, if not being there already.
That is the soft landing our policy makers are trying to achieve and it could be in prospect, in part because the underlying economic conditions prior to the ‘pandemic event’ were disinflationary anyway. We might recall in early 2020 Australia was headed for a potential recession. The growth and inflation of the recent era were induced and fragile. Maybe it is no surprise that we may be rapidly returning to a condition normal, where financial conservatism is more likely and inflation is under control?
