With President Trump rattling sabres at Iran and oil prices surging, Australian households are caught in the crossfire of geopolitical brinkmanship and a Reserve Bank that may be about to make things worse. Here’s what the latest inflation data tells us – and what the RBA should do with it.
Given the US President seems to be adopting what I’d say is his “Dirty Donald” persona, aimed at the Iranian leadership, which has sent Brent crude futures to US$118 a barrel and Wall Street down overnight, Treasurer Chalmers has hinted the temporary cut in the fuel excise could be given an extension.
This would be a great idea if the RBA is dumb enough to raise rates next week. For those hoping for my longshot call that the RBA could be smart enough to hold fire on an expected rate rise next Tuesday, yesterday’s Consumer Price Index reading gave a glimmer of hope.
In fact, on the back of that data, the money market reduced the expectation of a rate rise of 0.25%, taking the cash rate to 4.35% from a worrying 90% chance to a still concerning 70%, but it’s better than nothing.
In case life got in the way of you catching the inflation figures for the March quarter, here they are in a nutshell:
- Headline inflation rose a big 1.1% in the quarter.
- Annual inflation was 4.6%, which was lower than the 4.8% predicted by economists.
- Automotive fuel prices were up 32.8% in March and 24.2% for the year.
- Trimmed mean inflation or core inflation, which the RBA cares most about, rose by 0.8% over the quarter, slightly below economists’ expectations of 0.9%.
AMP economist Diana Mousina, who said the economics team had looked at trimmed mean inflation, which excludes the top and bottom 15% of price changes and reported that “the good news from today’s release is that trimmed mean inflation came in slightly below the RBA’s February forecast of 0.9% for the March quarter at 0.8%.”
Now the annual trimmed mean inflation is still 3.5% and while that would worry the RBA, the March quarter brought a lower reading and suggests core pricing pressures could be trending down.
And I loved this from Mousina: “In the absence of that shock – if oil prices had not risen – monthly inflation would have been flat and annual growth would have gone down to ~3.4% year on year (from 3.7% previously), rather than accelerating to 4.6%.”
So that leaves me with this thinking: If Donald wasn’t doing his Clint Eastwood/Dirty Harry–Dirty Donald, gun-toting threats to Iran, threatening to keep the Strait of Hormuz blocked by his navy until Tehran gives up on its nuclear ambitions, then I could cop the RBA’s potential unnecessary rate rise next week.
However, this isn’t the case. A drawn-out war keeps petrol prices high and could create a recession, which will kill inflation, which would be falling if there was no petrol price spike. Also, as I said yesterday, we have had rate hikes in February and March and the petrol price rise is akin to one or two rate rises.
Interestingly, apart from petrol price spikes, Mousina notes the other two problem areas were “new dwelling purchase construction costs (up by a hefty 0.5% over the month of March) and rents which are top contributors to price growth (up 0.2% over the month).”
With that information in mind, I’ll let you play economist. Let’s put you on the board of the RBA next week and now let me ask you this question: “Will another interest rate rise lead to higher builders’ costs and higher rents from landlords who usually have loans, and therefore more inflation?”
To channel Eastwood’s ‘Dirty Harry’ character, I’d ask you, if you were thinking about raising interest rates: “Do I feel lucky? Well, do you, punk?”
Given all this, if the RBA is dumb enough to pull the trigger on another rate rise, then I hope Treasurer Chalmers is smart enough to extend the temporary cut in the fuel excise, which helps put a lid on inflation rather than making it worse.
