The inflation data is painting a clear picture now… Is the RBA listening?
It looks like the cost-of-living crisis might finally be coming to an end.
We got monthly inflation data last week, and it was pretty soft. At just 0.2% in the month, it’s pretty tame.
I mean, if we got 11 more months at just 0.2%, we’d end up with an annual inflation rate of 2.42% – smack bang in the middle of the RBA’s target band.
So it’s fairly tame.
As it is though, it’s coming after some stronger months, so the headline annual inflation rate is still holding at 6.8%.
That said, it’s the second fall in a row in the headline inflation rate, and it does seem to suggest that inflation is easing.
Especially when you combine it with the partial indicators of inflation in the business surveys – like the PMI survey and the NAB business survey:
It seems to tell a clear story that inflation has peaked and is on the way down.
That would be my guess.
The only fly in that ointment is electricity prices. Electricity is far and away the hottest price component in the CPI’s basket of goods.
And that worries me because there’s worse to come. The Australian Energy Regulator approved double digit increases in retail electricity prices last financial year.
Their draft default market offers suggests they’re about to do the same thing again in July, only with much bigger increases: 31% in Victoria, 29% in regional Queensland.
That means that electricity will keep contributing (strongly) to inflation.
And what we’ll need to see is the rest of the items in the CPI basket, not only falling, but falling fast enough to offset the increase in electricity prices.
That’s hard to predict.
My personal feeling is that they will. Inflation will continue to soften. But it might not be a straight line down…
And with that, all eyes turn to the RBA.
The RBA’s mandate is to break the back of inflation whenever it pops its head up.
Will the RBA be convinced that its “Mission Accomplished”, or will it want to nail at least one or two more nails in that coffin?
My guess is that we’ll get one more rate hike tomorrow, and then the RBA will pause.
Some people think they might pause tomorrow, but I’d be surprised. I reckon they’ll take a “one more nail, just to be sure” approach.
But it’s worth remembering that Aussie households are already bearing the brunt of the most brutal rate hike barrage in the world. This chart below comes from the RBA themselves:
The reason why Australia is leading the pack, even though the US Fed has raised official rates more quickly than the RBA is that most of the Australian market is on variable rates, so rate hikes feed directly into household finances.
In the US, variable rates are unheard of. It’s all fixed-rates.
So, even though inflation is not definitively done and dusted, it’s worth remembering that Aussie households have taken a massive hit.
After Tuesday, it will be criminal if the RBA keeps hiking rates further.