Stephen Miller

“Give me a one-handed Economist. All my economists say ‘on the one hand…’, then ‘but on the other…” – Harry Truman (US President 1945-53)

Australia: Inflation Trepidation

The April Monthly consumer price index (CPI) indicator for April may have caused a bit of handwringing at the Reserve Bank of Australia (RBA).

That report revealed an annual increase in that indicator to 3.6 per cent compared with an expected 3.4 per cent.

There is a case to be made (maybe not a strong one, but a case nevertheless) that the numbers aren’t as bad as they appear at first glance. Some of the difference to the consensus expectation is attributable to rounding and revisions as well as a surprise inclusion in the April monthly indicator of health insurance premium increases. The seasonally adjusted month-on-month increase was 0.2 per cent, which isn’t that worrying but that may just be offsetting higher reads in March and February.

My best guess is still that the RBA won’t increase the policy rate.

I don’t hold that view with any immense conviction.

At the risk of reaffirming Harry Truman’s famous lament at the lack of “one-handed economists”: on the one hand, inflation is clearly stubborn and there are upside risks to the RBA’s forecast; on the other, with activity growth tepid at best, and household spending weak (Tuesday’s April retail trade release affirms that), the labour market may be more fragile than the recent labour force releases suggest.

The RBA has a dual mandate of inflation at target and minimising unemployment.

The Governor has described the balancing of risks between the timely return of inflation to target and minimising any excessive activity and employment dislocation as akin to the negotiation of a “narrow path”. Perhaps tightrope walking might be a more fitting metaphor.

The most likely scenario is an extended pause in any policy rate adjustment until the RBA is convinced that its current trajectory for the return of inflation to target is secure. That may see any policy rate reduction put back to sometime in the first half of 2025.

If the timely return of inflation to target proves elusive so that the RBA misses its June quarter trimmed-mean projection of 3.8 per cent, there may well be a policy rate hike.

A sharper than anticipated slowdown resulting in a greater than anticipated dislocation in the labour market may change that calculus. But despite languid activity growth and my fears around the fragility of the labour market, there is little sign of that occurring.

The reality is that those of us who were not long ago anticipating a policy rate reduction this year may have to cool their heels for a while yet.

So might a government that heretofore had been anxiously anticipating a pre-election policy rate decline.

I wonder what Harry would do?

Coming up

US April private consumption expenditures (PCE) price index

Friday sees the release for April of the Federal Reserve’s (fed) favoured inflation measure, the core private consumption expenditures (PCE) price index.

The 3-month annualised or “inflation pulse” measures of the core PCE were at their highest in 12 months in March. However, with there seeming to be some marginal abatement of price pressures evident in the “pulse” measures for the core CPI, markets will be looking for a similar signal from the core PCE.

Expectations are for the annual rate to fall ever so slightly to around 2.7 per cent from 2.8 per cent in March. That would be the lowest result since February 2021. However, that largely reflects a marked declaration in inflation through the second half of 2023 before an apparent re-acceleration in 2024.

On a 3-month annualised basis that would translate to an increase of around 3.2-3.3 per cent for April, down from 4.4 per cent in March but still well above what 1.6 per cent trough in December and still some way north of the Fed’s target of around 2 per cent.

Nevertheless, I think the Fed would regard such an outcome as satisfactory but not satisfactory enough to elicit any change in the recent “high for longer” themed communication. It would be, to use Atlanta Fed President Bostic’s expression, “far from failing but not stellar.”

On another matter, it may be of interest to gauge any Fed reaction to the recent back up in bond yields should it persist.

That has stemmed from “digestion” problems relating to the bond market’s capacity to swallow the increasingly larger bond issuance needed to fund the gargantuan US budget deficits.

That back-up in yields, involving as it does a tightening of financial conditions, may feed concerns of weaker economic activity. That would ease inflation pressures and potentially switch financial market’s focus to the consequences of declining activity growth.

Eurozone provisional May consumer price index (CPI)

Friday also sees the release of provisional May HICP data for the Eurozone.

On a headline basis, annual May CPI is expected to accelerate a little from the 2.4 per cent recorded in April to somewhere around 2.5 to 2.6 per cent. On a core basis that translates to a slight increase from April’s 2.7 per cent to 2.8 per cent.

German inflation released overnight revealed a marginal surprise to the upside but not enough to materially alter expectations.

That is still a little way north of the European Central Bank’s (ECB) 2 per cent target, but such an outcome would not prevent the ECB from instituting a cut in its various policy rates when it meets on 5 June. As much as anything that reflects languid European growth which implies some further disinflation in the pipeline.

Earlier this week, France’s central bank Governor Francois Villeroy de Galhau described a reduction in the ECB policy rate(s) next week as a “done deal” and indicated an unwillingness to rule out a follow up cut in July, saying he wanted “maximum optionality”.

His Dutch colleague, Klaas Knot was more circumspect with regard to policy guidance beyond June.

Continued elevated wage growth has sometimes been cited as an ongoing concern as has ongoing “stickiness” in services inflation and recent bursts of commodity price inflation.

In that context, the highly unlikely event of a number well in excess of expectations (say a core number above 3 per cent) may make for a more keenly debated 5 June meeting than M. Villeroy de Galhau currently contemplates.

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