The December Consumer Price Index was released on Wednesday, and it was higher than the markets expected, suggesting inflation is still high.
During December the weighted mean was 0.6 per cent for the quarter, the annual CPI being 3.1 per cent, meaning that the price for a basket of 11 types of consumables was 3.1 per cent higher than December 2010.
Many in the markets were expecting the CPI to be much lower; they assumed economic growth was stalling at the end of 2011 and the RBA would have to cut rates to give the economy a chance.
The RBA is certainly mandated to keep inflation within 2 and 3 per cent, and with CPI figure running over 3 per cent, it has every right to hold interest rates.
However, with the Consumer Price Index trending downwards during the second part of 2011, employment losing ground and the ongoing European crisis, I believe economic activity is slowing and the RBA will cut interest rates soon.
I base this on a couple of reasons. Firstly, ‘headline’ inflation is not always a universally experienced number.
You may have wages growth in one sector which increases inflation, but only a handful of people enjoy those wages. Yet raising interest rates to tame the inflation hurts everybody.
Likewise there are items in the CPI basket that may be blowing out, but not all Australians are buying them.
The 2011 March quarter CPI moved upwards 1.6 per cent on the previous quarter, a figure more than double what economists are used to. It was due to inflation in ‘transport’ (oil prices) and food, which had been hit by disasters in Queensland. Bananas in particular were hitting $14 a kilo. Yet, if you chose to not buy bananas you were not necessarily aiding the inflation.
So the idea that the reasonably high prices reflected in the current CPI means everyone is spending money, is not a clear conclusion.
The ‘housing’ section rose 0.4 per cent in December but it was due to the rise in rents (1.0 per cent) rather than prices for owner-occupied houses (0.3 per cent).
It works the other way too: in the December quarter, food and beverage was cheaper than in the September quarter, but this was achieved because fruit (-13.4 per cent) and vegetables (-5.0 per cent) dropped dramatically as the Queensland crops came back online. In other words, slightly cheaper groceries in December merely offset more expensive fruit and veggie of nine months ago.
Somehow the RBA has to tame the inflation without hurting an otherwise flat economy. What should it do?
My choice would be to cut rates before the economy slows dramatically. But I can say that from the sidelines – who’d want to be on the RBA board right now?
* Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on email@example.com with any queries you may have or check www.ybr.com.au for your nearest branch.