Stephen Miller
Yesterday’s Australian monthly CPI inflation report makes the September RBA meeting “live”. In my assessment the Board should increase the policy rate at that meeting. I expect it will.
The July report makes it is hard to construct a narrative around declining inflation and again serves to emphasise Australia’s poor inflation performance relative to other developed economies – its structural homegrown inflation proclivity. The annual rate of increase is stuck at 3.6 per cent. Perhaps even more worrying the annualised 6-monthly rate of increase is at 3.9 per cent. That is the highest in the (admittedly short history) of the published monthly series.
What is more, “sticky” inflation must cast some doubt on the prevailing RBA (and financial market consensus) narrative that monetary policy is restrictive. A “real” policy rate of somewhere around ½ – ¾ per cent does not strike me as particularly restrictive, at least in terms of an inflation containment challenge compounded by policy missteps elsewhere.
US FED
Fed Chair Warsh has an opportunity to address some communication missteps when he addresses the Kansas City Fed’s Jackson Hole symposium on Friday night (AEST).
Bond markets have been unsettled by what they regard as still “sticky” inflation along with a perceived lack of inflation resolve on the part of the Fed Chair. Interventions by President Trump and Treasury Secretary Bessent’s clumsy intervention in the bond market have not helped the picture. Last night’s July private consumption expenditures (PCE) price index report provided some evidence that inflation continues to be less than feared. The traditional Fed inflation focus – the core private consumption expenditures (PCE) price index – is, at 3.3 per cent, well north of the Fed target of 2 per cent.
However, Warsh prefers the Dallas Fed trimmed-mean measure which is currently running at 2.3 per cent – not that far from the Fed target. That gives the Warsh Fed at least some temporary cover in eschewing a policy rate increase. Warsh has articulated is a desire to reframe the Fed’s strategic direction via the establishment of a series of taskforces covering communication, Fed balance sheet management, a review of data sources, productivity and jobs, and inflation drivers and measurement. By giving some indication of progress on these taskforces at Jackson Hole, Warsh might be able to better articulate a rationale for an unchanged policy rate.
Bond markets still have a bit to worry about, particularly the huge US Budget deficit, and, despite glimmers of hope, inflation is still a concern, but some communication around progress on the taskforces might be helpful for markets in gaining an understanding of the drivers of monetary policy under the Warsh regime at the Fed.
By Stephen Miller, investment specialist
