The latest inflation figures confirm that inflation has peaked and the Reserve Bank was correct not to raise rates earlier this month.
The recent review of the Reserve Bank recommended a new board with “experts” on monetary policy to decide interest rates changes rather than the current “amateur” board. And yet, were such a board already in place, given the advice of many economists such as the Crawford School of Public Policy’s “Shadow Board”, the RBA would likely have raised rates earlier this month.
But inflation is clearly on the way down. Given the lag of rate rises yet to affect the economy, further rises would have only served to stomp on an economy already slowing.
So, score one for the amateurs of the current RBA board.
And while the annual inflation of 7% in the March quarter remains well above the RBA’s target range of 2% to 3%, the figures show little reason for a rate rise next month either.
With the official quarterly CPI figures released on Wednesday came the latest monthly figures. These showed that inflation in the 12 months to March rose 6.3%, with the rise trending down steadily:
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The amount of large price increases across the 87 items in the CPI basket of goods and services is also falling. Prior to last year, the prices of around three-quarters of the items rose by less than 3%. By December last year that was down to just 14% of all items.
But the March figures showed a nice turnaround.
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The turn is not drastic, but it is obvious, especially given how linked Australia’s inflation is with the rest of the world. Across the OECD inflation is slowing, and Australia’s slowing is around the average of the 38 economies:
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As I have noted, Australia follows the US pretty closely, and the March figures reinforce the notion that inflation is heading back to a normal range:
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We are also seeing less price growth coming from the world prices of “tradable items”. This is because the prices of goods are moderating:
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But we’re also seeing the prices of non-discretionary items (those things you can’t avoid paying for) rising much more than the prices of “discretionary items”. This is bad news for lower-income households, because they spend a greater share of the income on non-discretionary items.
In the March quarter, housing costs contributed 0.84% points to overall inflation growth. Given the CPI in the March quarter rose 1.4%, that means housing accounted for nearly 61% of all of the inflation in the first three months of the year.
When we break this down to individual items, it’s clear why: gas, electricity, rents and new dwelling purchases were all in the top 15 contributors to inflation:
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Nine of the biggest 15 drivers of inflation in the first three months of this year were non-discretionary items (10 if you include tertiary education, which for some weird reason the ABS does not count as “non-discretionary”).
But, importantly, these price rises are in areas that actually are controllable by government intervention and barely subject to greater demand.
Gas and electricity prices aren’t going up because people are suddenly using more of them. The same goes with medical and hospital services. Education costs are also very much within the government’s remit, as are pharmaceutical products.
Take away the costs of these items and inflation is actually around where the RBA would like it to be. Obviously, you can’t just remove these prices from the figures, but it does highlight inflation is not due to runaway demand off the back of cashed-up households spending like mad.
The one type of household very much finding it tough right now are renters.
Last year there were lots of anecdotes about rental prices rising quickly, but the official data showed little change. This, as I have explained, is because the CPI measures all rents, not just new ones. But as people’s contracts came up for renewal, the increase in prices has begun to show up:
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The quarterly figures showed a 4.9% annual growth of rental prices across Australia, with highs of 7.6% in Perth and 7.0% in Brisbane.
Again this is not because renters are flush with cash, but because housing supply issues are so deranged that landlords around the country can use the cover of higher interest rates to charge more and know they will be able to get someone desperate to pay.
The CPI figures still show very high inflation, but are also falling from what it was last year. The Reserve Bank does not need to raise rates until it sees signs of that fall ending – none of which are present at the moment.
The ones who are hurting most from the rising prices are those who rent, and those on low incomes who devote most of their income to necessities. And rather than caring about what the RBA does next month, they will be looking to the budget for some relief.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
