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July 23, 2012 – 2:53PM
 
Michael Pascoe

Michael Pascoe

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 The week ahead with Michael Pascoe

Update It’s 15 years since the Reserve Bank’s core inflation measures fell below the bank’s target range. It’s highly likely we’ll find out on Wednesday that inflation is again too low.

The June consumer price index hasn’t had the same media build up as the March figure as the RBA hasn’t signalled that this Wednesday’s announcement will have any particular bearing on its next board meeting. Three months ago, the CPI was anticipated as the final plank in the platform for RBA to cut rates. This time, the latest board minutes as good as promised monetary policy will be held steady.

It took the Asian financial crisis in 1997 to push the RBA’s trimmed mean, weighted median and the CPI-excluding-volatile-items below two per cent. This time round it’s the European financial crisis. (The American financial crisis, the GFC, didn’t get a look in as inflation has been running away from the RBA, heading towards 5 per cent, before Lehman Brothers went under – the GFC just gave us a soft landing.)

The “headline” year-to CPI dropped to 1.6 per cent in March, but the smoothed nature of the RBA’s core measures held over 2 – and that was something of an illusion, relying on the rather old June and September quarters. Annualising the most recent six months showed inflation was running at 1.8 per cent and that’s about what the annual figure will prove to be on Wednesday.

Over-utilised coverage

Public inflationary perceptions, egged on by tabloid media and self-serving politicians, remain fixated with utility bills and blind to the areas where prices have come down, even “down, down”. The forecast contribution by the carbon tax of an extra 0.7 points on the CPI will help fuel those perceptions.

The RBA has already stated it’s ignoring the carbon price impact, as it did the GST. With most people compensated for the rise, it’s of little moment to the genuine cost of living. Yet just this once, our central bank might be happy to include the carbon count.

The RBA’s job is to keep inflation within the 2 to 3 per cent range “over the cycle” so it’s hardly going to panic and dramatically slash rates on a couple of quarters’ figures, but the core inflation rate starting with a one should give RBA board meetings a different tone to what we’ve generally been used to.

For a start, it removes one defence against the chorus always calling for interest rate cuts. The strong March quarter national accounts changed some of the chorus’ rhetoric from “the RBA will cut rates” to “the RBA should cut rates”. After Wednesday, the chorus could be asking: “Why not cut rates?”

And, on the monetary doves’ side of the argument, a closer reading of the last board minutes seems to show a little more scepticism about those national accounts than most initial interpretations.

Tame inflation

Last Tuesday’s minutes were generally taken as strong indeed – inflation’s tame, the economy on the up and therefore interest rates steady unless or until something worse happens – but the RBA was also warning that the June quarter scorecard won’t be so flash.

After noting the March quarter stats, the minutes sound cautious: “However, consumer and business sentiment and other timely indicators of activity suggested that the economy was likely to record slower growth in the June quarter.”

And the RBA doesn’t seem entirely convinced the ABS was counting correctly in March: “The strength in goods consumption was somewhat at odds with a range of partial indicators and the Bank’s retail liaison over the same period, though more recent liaison had a stronger tone.”

As for housing: “… indicators suggested that the housing market remained subdued. Dwelling activity was likely to have fallen further in recent months and indicators generally suggested that activity would remain relatively weak in the near term.”

The glass is indeed half full. The statistics say we don’t need further stimulation right now and it’s nice to have plenty of ammunition at the ready while Europe remains so precarious. If low inflation persists, we should see a central banker. Setting monetary policy remains an interesting pastime.

Woolies

P.S. For those who continue to believe groceries are more expensive, try this paragraph from Woolworth’s annual sales figures released this morning:

“Average prices continued to experience deflation for the second half of 4.4% (first half deflation of 3.7%) and for the fourth quarter of 4.3% when the effects of promotions and volumes are included. The higher deflation in the second half reflects the impact of produce deflation.”

According to Woolworths, the significant produce deflation – 5.7% for the year – came from the high prices caused by the previous year’s natural disasters cycling out of the equation.

By another measure, the “standard shelf price movement index” which excludes specials and promotions, prices were flat for the year. The big difference with average prices indicates just how much effort goes into those specials and promotions, which Woolworths’ suppliers tend to pay for.

Whoever’s footing the bill, it’s simply a nonsense or very poor shopping in the wrong place at the wrong time ignoring the specials, to continue to claim groceries are more expensive.

More likely, it’s a manifestation of the negative group think displayed by a large part of the nation.

Michael Pascoe is a BusinessDay contributing editor.

Read more: http://www.smh.com.au/business/the-economy/now-for-something-different-inflation-too-low-20120723-22j50.html#ixzz21Qs0J8BB

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