Today’s inflation figures were genuinely surprising. Consumer prices rose just 0.4 per cent in the December quarter, well below expectations. Even more surprisingly, the Reserve Bank’s measures of underlying inflation were just as tame, up 0.4 per cent (taken as an average of the “weighted median” and the “trimmed mean”). A quick look at the historical time series for these “analytical” measures of inflation, as the Bureau of Statistics calls them, shows quarterly underlying inflation is the slowest it has been since the series began in 2002.
So in the middle of our biggest mining boom since the Gold Rush days, prices have been remarkably well behaved, for now at least. Why? The soaring Aussie dollar has helped, making imports cheaper and enabling retailers to become even more aggressive in their discounting to otherwise reluctant consumers. Reflecting this, the prices of imported consumer items, like clothing, footwear and computers continue to tumble.
On the upside, food prices are on the up and up. Fruit prices jumped 15.5 per cent and vegetable prices 11.4 per cent. It’s reasonable to assume some of this reflects the impact of the floods, which really began in December. Also up are petrol prices, as improved prospects for the global economy sends crude oil prices northward. I expect we’ll be hearing a lot more about that in the coming year.
Before you get too excited about today’s tame inflation number, remember that this is but a glimpse in the rear view mirror. The Reserve is more worried about what is to come. Already we know that supply shortages resulting from the floods will cause short term spikes in food prices. Longer term, the rebuilding efforts will also put extra pressure on already limited supplies of workers and resources. It’s economics 101: limited supply and increased demand means prices rise.
Today’s figures certainly relieve pressure on a hawkish Reserve Bank to lift interest rates immediately. My guess is it’s enough to hold fire when they meet next Tuesday. But the Reserve has been singing the same tune for a while now: in an economy running at close to capacity, fuelled by a huge income-shock coming from higher commodity export prices, inflation risks abound.
It’s times like this when the pedal really hits the metal for Reserve Bank governors: do they rely on backward looking statistical releases or trust their guts about where the economy is heading? Glenn Stevens strikes me as a man of strong intestinal fortitude.
Interest rates are still likely to rise this year and probably sooner than you think.