Inflation has gotten out of control while the RBA has been asleep at the wheel
Australia’s consumer prices were up 5.1% in the March quarter of 2022. Quite a bit more than the RBA was predicting and above the estimates of almost all the experts. While the headline number is shocking, its the highest it’s been in 20 years, reality is even worse.
The March quarter figures sill bake in couple of quarters effected by reduced activity as a result of COVID-19 lockdowns. If we normalise those quarters we get an eye watering annualise inflation rate of 8.67% to March 2022.
A couple of takeaways…
First, there has been a lot of talk about the current bout of inflation being due to external factors like supply chain crunches, wars, and general global dislocation due to COVID. This line of reasoning is wrong. 100% of excessive inflation is due to bad monetary policy. Always! This is true for every respectable theory of economics (be it Keynesian, Austrian, monetarist etc).
It’s the RBA’s job to keep inflation under control. It’s been obvious for at least eighteen months that the unprecedented stimulus provided by the Australian Government would lead to growth in nominal spending once lockdowns ended and people could go out and spend all the money they had been saving while stuck in lockdown. Supply side issues just exacerbated the demand side issues, and when wages finally start playing catch up, inflation is only going to go higher. The RBA missed the boat by not normalising interest rates early to avoid an inflation blowout.
Second, the RBA has to raise rates at their meeting next week. A cash rate of 0.1% is clearly no longer appropriate for our economy. The market is expecting an increase, with a rate rise to 0.25% fully priced in and a 25% chance of an increase straight to 0.5%. If the RBA decides to sit on their hand yet again, they will lose all credibility.
I personally hope we see a strong move by the RBA, directly to 0.5%. Managing inflation is as much about the message that the RBA gives to the market than the actual interest rate moves it makes, and a large move so closely linked to the release of inflation data will send a strong message that the RBA is serious about controlling inflation this cycle.