Another RBA rate rise won’t fix inflation – it will just smash households already hit by soaring fuel costs | Greg Jericho
With the release of the March inflation figures on Tuesday showing a big jump, the likelihood of a rate rise next week has become all but certain.Admittedly it was all but certain before the release of the figures, because the Reserve Bank is determined to smash households even though the cause of inflation is overwhelmingly due to international events.A month ago I noted of the February inflation figures that they were out of date the moment they were released given they did not take into account the impact of the rise in prices from the war on Iran.And so it has come to pass.In the month of March alone, inflation rose 1.
1% and annual inflation rose from 3.7% to 4.6%.But we need to remember that this is the new monthly measure – which is quite erratic.The old-style quarterly measure of inflation has annual inflation at just 4.
0% (because petrol prices only rose in March, not in January and February)If the graph does not display click hereEveryone expects the Reserve Bank will use this as an excuse to raise rates, but really the figures show just how pointless such a rise would be at affecting inflation,It would instead just be another whack on households who have already been hit by fuel costs,Almost all of inflation in March was driven by petrol prices,Last month I forecast automotive fuel would rise 30%,I was wrong – it rose 32%!If the graph does not display click hereThat translated to automotive fuel contributing to 1 percentage point of the monthly increase in inflation.
If we excluded petrol price rises, inflation in March would have been just 0.1% rather than 1.1%:If the graph does not display click hereThis is why, when you peel back the figures, things actually are not that bad.They certainly do not warrant the doom and gloom from some economists who seem desperate for a recession and are demanding the Reserve Bank raise the cash rate all the way up to 5%.Yes, inflation rose to 4.
6% – a huge jump.But that was because in late February the US and Israel began bombing Iran and the strait of Hormuz was closed and sent oil prices soaring about 70%.We are not going to see a jump like that again – even if bombing was to resume:If the graph does not display click hereThat one-off increase in fuel prices was an exception.If the RBA had any sense it would ignore it.The cash rate does not change the price of oil, and has only a marginal impact via the exchange rate.
The RBA says it likes to focus on the “underlying” or “core” inflation, which is measured by the trimmed mean.This measure strips out the biggest price falls and rises, and stayed utterly flat at 3.3%.Similarly, the RBA looks at whether the inflation is driven by “tradable” or “non-tradable” items.Tradeable ones are those whose prices are mostly set internationally (fuel, beef and lamb, furniture, clothing), whereas non-tradeable prices are set within Australia (rents, childcare, education, and all services).
In March, the annual growth of tradable items went from 1.3% to 4.5% while the growth of non-tradable prices fell from 5.0% to 4.6% – so the domestic price growth slowed:If the graph does not display click hereThe price growth of market services also fell from 3.
5% to 3,1%, and the prices of discretionary items – those goods and services that we buy more of when we are feeling flush – also fell, from 3,0% to 2,8%,There is no sign that the domestic economy is speeding up or running hot.
In March, petrol prices rose; but in April they have fallen to less than they were before the Iran war began – due in large part to the halving of the fuel excise:If the graph does not display click hereThis means that whereas automotive fuel prices caused a big increase in inflation in March, they will also cause a big fall (or at least a very small rise) in inflation in April.There is a lot going on with prices.The flow-through of higher food prices due to fuel and fertiliser costs is mostly still to come, and also – as we saw in 2022 after the Russia invasion of Ukraine – companies will likely use the conflict to fatten their own profit margins by increasing prices.The uncertainty, however, surely should see the RBA realise it is best to wait and see what happens.Next month the latest wages data will be released and it will show that once again real wages have fallen and are not contributing at all to increased inflation.
None of this though will I suspect stop the RBA.The desire to raise rates, even if it is merely to look like they are doing something, is baked into their DNA.Greg Jericho is a Guardian columnist and chief economist at the Australia Institute
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