In the past year inflation grew 5.4%, down from 6% in the June quarter and almost a third below the peak of 7.8% at the end of last year. And yet commentators seem desperate for the Reserve Bank of Australia to raise interest rates next month to show it is tough on inflation. But raising rates now would not be tough, it would just be cruel.
There is rather a mania among the economic class in Australia for high interest rates. On Wednesday the Australian Bureau of Statistics released the latest CPI figures and the annual growth – which is what the Reserve Bank targets – fell significantly from the June quarter to 5.4%. That is the lowest it has been since June last year and shows a nice path back to the RBA’s target of 3%:
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And yet despite this, all the reporting was about the Reserve Bank being under pressure to raise rates on Melbourne Cup Day.
The reason is that in the September quarter alone, prices rose 1.2%, which was the first time since last year that quarterly inflation did not fall. It was also above the economists’ estimates (not that that really matters).
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A one quarter rise is really not enough reason to raise interest rates, especially when you consider that even were that growth to continue to the next nine months, annual growth would be just 4.8%.
The suggestion that the RBA must act is even weirder when we look at what drove inflation in July, August and September.
The big one was petrol prices. Unleaded petrol prices rose 7.4% in the quarter, while diesel went up 10%:
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There’s no real secret to why this happened – world oil prices rose due to measures by Opec to cut supply. There was nothing the RBA could do about this, and all it can do is hope that prices continue to fall as they have been in the past month or so, because our petrol prices very closely follow world oil prices:
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All up, automotive price rises accounted for 20% of the total increase in inflation in the September quarter (0.25 percentage points of 1.2%). The second biggest contributor to inflation was the cost of new dwelling purchase by owner-occupiers. This is not house prices, but the cost of building them. This has been affected by recent big price rises in construction materials from overseas.
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And the third biggest contributor was rents, which are rising quickly in every capital city:
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The good news for rental prices is there does seem to be a sort of slowing of price growth, but that is only a small comfort. In the past year, rental prices on average rose 7.6% – the fastest they have gone up since March 2009.
The problem for the RBA – and those who think it should raise interest rates – is that when we look at the main drivers of inflation, there is not much that interest rates will affect. Petrol prices, the cost of building houses, rents, electricity prices, property rates and charges, insurance, tobacco, medical and hospital services, beer, and water and sewerage prices are driven mostly by international factors, or government regulatory interactions.
In such cases, governments can have a much greater impact than interest rates.
Michelle Marquardt, the ABS head of prices statistics, noted for example that electricity prices in the quarter “were partially offset by the Energy Bill Relief Fund rebates”. She noted they reduced “electricity bills for all households in Brisbane and Perth, and for concession households in the remaining states and territories”.
The impact was rather sizeable – had the rebates not occurred electricity prices would have increased 18.6% rather than 4.2%.
The Reserve Bank often worries about the price rises of services, because they involve lots of workers and are linked with wage growth. But here again we see little reason for the RBA to stamp its foot on the brake.
The annual growth of service prices is falling, and wages are not in any way keeping up with the cost of services:
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Indeed, when we look at the overall growth of inflation what becomes very clear is that the cost of “non-discretionary items” – the necessities of life that you cannot avoid paying – are rising the fastest.
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In the September quarter, the cost of non-discretionary items rose 1.4%, while the cost of discretionary items rose just 0.7%. This alone will have an impact on economic growth in the same way that interest rate rises do.
The RBA raises rates because it increases the cost of repaying mortgages. This means people with home loans have less money to spend on other things and thus slows the economy.
But, as the Treasury secretary, Steven Kennedy, pointed out in his appearance before the economics committee at Senate estimates, higher prices of necessities such as petrol has the same effect. You can’t avoid paying electricity bills or rent or petrol (at least in the short-term) and so, just as with higher interest rates, that means you have less money to spend on other things.
In the next two weeks before 7 November there will be much talk about how the RBA needs to be tough and show it will keep inflation down. But these latest figures just show there is little that the RBA can do to affect prices.
People are already getting hit by higher costs that are reducing their ability to save and spend money on non-essential goods and services. Another rate rise would just hurt low- to middle-income earners for no reason.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
