Stephen Miller
An annual increase of 5.2 per cent in the annual trimmed-mean (TM) inflation rate makes a policy rate rise from the Reserve Bank of Australia (RBA) on Tuesday, 7 November a near certainty.
The October RBA Board meeting minutes revealed that the Board “has a low tolerance for a slower return of inflation to target than currently expected.”
Given that the RBA forecast was around 4.8 per cent, it would be extremely difficult to reconcile that “low tolerance” with the absence of any policy rate hike.
RBA Governor Michele Bullock as recently as yesterday stated that “the Board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation.” Today’s release reveals that “material” benchmark has been more than met.
Not only is a policy rate hike entirely appropriate in the wake of the exhaustion of the RBA’s hitherto (too?) high tolerance for an elongated return of inflation to the target, but it is also given some extra urgency by some gathering inflation storm clouds on the horizon.
Central bankers around the world have remarked on the “stickiness” of service price inflation. The globalisation of labour supply (after the fall of the Berlin Wall and the “export” of labour from large emerging market economies such as China and India) is abating; globalisation of goods markets is in retreat as governments everywhere introduce protectionist measures under the guise of “industrial policy” and “national champions”; domestic regulation of markets is increasing in scope (leading to upward price pressures); and baby boomer workforce participation is declining (limiting labour supply and lifting wages).
The transition to clean energy involves ongoing costs to business, which is not to say it is undesirable, but it does complicate the task for inflation-focused central banks.
To be fair, Australia’s high immigration rate somewhat mitigates these influences over the longer-term but won’t eradicate them. Indeed, in the short-term, pressure on housing rents from immigration may tip inflation risks the other way.
There are some other purely domestically driven troublesome inflation portents. Recent changes in the regulatory environment in Australia, particularly in relation to the wage-setting and the industrial relations framework, potentially exacerbate an already stubborn inflation problem. By weakening the link between productivity and nominal and real wage growth, those measures run the risk of entrenching higher inflation in Australia compared to elsewhere particularly.
The Governor noted in her Statement following the RBA October Board meeting that “wages growth … is still consistent with the inflation target, provided that productivity growth picks up”. (My emphasis). That increasingly looks like a big “if”!
Wage increases are digestible in times of robust productivity growth. However, productivity growth in Australia is abjectly poor and even with relatively modest wage growth, unit labour cost growth (the most relevant labour cost gauge for inflation) is at over 7 per cent per annum.
The interplay between productivity and wage growth are domestic developments upon which the RBA will cast a keen eye.
In the meantime, expect the RBA to reveal hawk talons on 7 November.
They may be on show for some time.