Household spending just hit a three-year high, inflation is running hot, and economists are lining up to tip more rate rises. But is the cure actually part of the disease?
No piece of economic data can be looked at without economists thinking whether that data will make the Reserve Bank raise interest rates. And so it was, when household spending grew at 7% in the year to July, which was the highest annual pace in at least three years.
A pretty smart colleague of mine looked at the numbers and said: “That will make the RBA move, after that CPI figure.”
That figure was a trimmed mean or underlying inflation at 3.6%, which is 1% higher than what the central bank wants. Well, is he right?
Grace Lagan of the AFR reports some important economists have changed their tune on rates. “A growing chorus of economists, including from three of the four major banks, now expect the Reserve Bank of Australia to increase rates as early as next month,” she tells us. “Some are saying two rate rises may be necessary to tame stubborn price growth.”
And Lagan reminds us that Treasurer Jim Chalmers and his boss Anthony Albanese blame the Iran war for the worst of our inflation, but are they right?
Before we get into the blame game, NAB’s chief economist Sally Auld, who a month ago was in the ‘no more rate rises’ camp, now thinks we could see a rate rise in September and November!
Powering this change of heart was not only the inflation number but also these spending figures which showed “it is broad domestic price pressures responsible for the surge” as Lagan explains.
She cites Deutsche Bank’s chief economist Phil O’Donaghoe, who was surprised that so many of the goods and services in the CPI (there’s 87 of them) had shown bigger-than-expected increases.
“What struck me this month was how my forecasts were biased to the downside by a little bit, not massively so, but so many expenditure classes were just a bit stronger,” he said.
But for anyone wanting to blame someone like Donald Trump (with his Iran war’s impact on oil prices) or Jim Chalmers with his May Budget that pushed house prices down and rents up, I think the latter looks like the candidate for the prime suspect.
Spending on rising rents and takeaway food were seen as key drivers of higher spending, and Dr Chalmers would certainly be the biggest influence on what people are paying for being a tenant.
Clearly, while oil prices haven’t helped inflation, given they have been high since February, someone, even without economic credentials, has to be wondering: “What was your thinking on rents with the Budget?”
The answer looks like: “Not smart thinking!”
Lagan reports: “Over the year to July, the price of dental services rose 3.8 per cent, the cost of motor vehicle maintenance was up 5.9 per cent, and hairdressing and grooming services rose 4.4 per cent.”
What this shows is business is trying to remain profitable with costs and imposts rising everywhere: from rents to interest rates on loans to demands from taxing treasurers across the country, along with wage earners wanting more money and shareholders wanting higher returns.
While this is all true, none of the economists are saying that people are spending more because the price setters (such as banks with their interest rates) are making people spend more. And while those without mortgages might be living the life of Riley (whoever he was!), a big chunk of Australia is spending too much on mortgages and rents because of policy decisions in Canberra.
And while a solution to curbing inflation might be to raise interest rates, high rates are also a significant cause of that inflation. And if Sally Auld is right and two more rate rises are needed to kill inflation, I expect Australia will fall into ‘the recession we didn’t have to have’ camp.
