Stephen Miller
I’m not sure that the news flow of the last week or so has managed to advance whatever one may have been thinking about the decision of the Reserve Bank of Australia (RBA) Monetary Policy Board (MPB) at its next meeting in August.
The minutes from the June meeting noted that policy was ‘somewhat’ restrictive but at the same time exhibited some handwringing around elevated inflation expectations. What might have been at the forefront of the RBA Board’s contemplations was the Fair Work Commission (FWC) decision to award a 4.75 per cent increase in the minimum wage and awards. That such an increase occurred against a backdrop of ongoing abject productivity growth and how it might inform wider wage negotiations is clearly a concern going forward.
The May monthly consumer price index report (CPI) was not as bad as feared and is probably consistent with the most recently issued RBA forecasts back in May.
Nevertheless, Australian inflation remains elevated. Trimmed-mean consumer price index (CPI) inflation in Australia is currently running at 3.6 per cent. That puts Australia at the top the developed country inflation league. That is not a (developed) World Cup we should want to win!
Some more positive news since the June meeting has been declining oil prices which might mitigate the dangers of oil price inflation broadening into something even more pernicious.
But Australia’s inflation problem is way more than just oil prices, as illustrated by the aforementioned adverse comparison of Australian inflation with elsewhere in the developed world.
Jim Chalmers might have us believe that the Middle-East tensions and the attendant ratcheting up of the price of oil is the primary driver of our current inflation challenge, and yes there is a skerrick of truth in that, at least in absolute terms.
But the stark reality is Australia has a structural homegrown inflation proclivity.
That homegrown structural inflation proclivity reflects, inter alia, the interplay of regulatory creep in labour and goods markets that impose costs on businesses, part of which are passed on to consumers. The regulatory regime is also reflected in the abject productivity growth which makes the task of inflation containment all the harder.
As I’ve stated in the past, this state of affairs is not just down to the current Federal Government. Rather it reflects a long-standing policy deficiency since the end of the Hawke-Keating and Howard-Costello eras. Governments (both State and Federal and Labor and Coalition) have long averted their eyes from addressing productivity enhancing policy measures. Just as importantly, little attention has been given to avoiding productivity diminishing measures attaching to (mostly well-intentioned but poorly thought out) regulatory oversight of labour and goods markets.
Sure, (to paraphrase the Prime Minister) people don’t sit around the kitchen table talking about low (or negative) productivity growth. But productivity remains central to enhancing standards of living not the least through mitigating inflation.
The decision to “pause and reflect” at the June meeting was understandable given concerns about looming cyclical fragility. In that context it reflected a view that there was some utility in using the “space” provided by preceding policy rate increases to assess how the economy was adjusting and the impact of disruptions.
However, both the RBA minutes and Governor Bullock’s comments would indicate that the policy rate might still need to be increased at a later date. That reflects, inter alia, governments’ inability to support the RBA’s inflation battle with supportive structural policies.
So, in determining the course of the policy rate over coming months, the RBA faces considerable challenges having to negotiate a tricky (dare I say “narrow”) path between structural inflation factors and cyclical fragility.
The June CPI release later this month looms as a key staging post in how the negotiation of that path may evolve.
Eurozone June “flash” CPI: ECB to stand pat in July
Overnight, Euro area CPI inflation for June came in a little lower than expected at 2.8 per cent at the headline level (compared with 3 per cent expected). The core reading was also better than expected at 2.4 per cent (2.6 per cent expected).
While inflation remains above the ECB target of 2 per cent, there now seems almost no prospect of a policy rate (deposit facility) increase from the current 2.25 per cent at the July 22-23rd meeting.
Speaking at the ECB’s Sintra Conference earlier in the week, ECB President Lagarde stated that she thought the ECB had gone some way to making the Eurozone economy less vulnerable to inflation shocks, perhaps reflecting a more rigorous financial framework. She also noted that tensions in the Middle East had subsided (even if resolution was ‘far from assured’). Overnight at that same conference, Lagarde stated that she thought the risks to inflation and growth are ‘broadly balanced’ which would indicate that she sees no compelling case for a policy rate rise. (She also expressed a scepticism regarding the utility of “forward guidance” and other features of COVID era monetary policy such as “quantitative easing”.)
Other ECB decisionmakers are less sanguine.
Markets see the prospect of a hike in as closer to 30 per cent in September.
The latest set of ECB forecasts were based on Brent oil prices of around $US82 per barrel. It is currently at circa $US73 per barrel giving the ECB some “space” to digest whether further inflation pressures might necessitate a further increase.
Coming up: US non-farm payrolls tonight (ahead of Independence Day holiday)
As mentioned above, even more benign looking measures of inflation such as the Dallas Fed ‘s trimmed mean core PCE measure is, at was 2.4 per cent in May, still a way above the 2 per cent Fed “inflation” target.
And progress on the inflation front has been excruciatingly slow.
So absent some sharp and unforeseen deterioration in the labour market a policy rate cut hardly looks proximate.
Tonight sees the release of the June non-farm payrolls report ahead of Friday’s Independence Day holiday.
Indications are that the labour market remains in satisfactory condition.
The May Job Openings and Labor Turnover survey (JOLTs) report saw openings mostly unchanged at a healthy enough 7.6m.
The ADP June payrolls report showed a solid enough gain of 98k (even if lower than the 113k increase expected). The ADP report is sometimes dismissed (too easily in my view) because of its poor record in foreshadowing month-to-month movements in the Bureau of Labor Statistics payrolls measure. However, it is just as good a measure of the state of the labour market as the payrolls report.
The June Institute of Supply Management (ISM) manufacturing index (PMI) released overnight paints a reasonably satisfactory picture of the US manufacturing sector: the index coming in unchanged at 53.3. The employment component increased to to 49.7 from 48.6 in May (50.0 is the neutral point between expansion and contraction). The prices component declined to 73.0 from 82.1 in May. That is still elevated but maybe a harbinger of some easing of price pressures to come.
A consensus outcome for payrolls of a circa 110k increase in employment and an unemployment rate unchanged at 4.3 per cent with average earnings growth of 3.5 per cent is not going to move the dial for any Fed members.
By Stephen Miller, investment strategist
