When will we get an interest rate cut? It's largely up to you
If you needed an excuse to be a bit of a tight-arse this Christmas, quote the latest inflation figures to your disgruntled family and friends.
If they’ve got a mortgage, not giving them a present may be doing them a favour.
Bear with me while I explain why.
At 2.8 per cent, the annual headline inflation number plunged back within the RBA’s 2-3 per cent target range for the first time in three years. So far so good, right?
But that sharp decline was largely down to the federal and state governments delivering their presents early, via massive electricity subsidies and increased rent assistance.
Those subsidies caused power prices to tumble by more than 17 per cent last quarter and nearly 16 per cent over the past year.
Data from the Australian Bureau of Statistics shows power prices were about 24 per cent lower than they would have been without government subsidies.
But this isn’t a gift that keeps on giving, there will be payback in future quarters as those subsidies end and the full impact of power bills falls back on consumers.
That’s why the Reserve Bank is razor-focused on so-called “core” or “underlying” inflation, which excludes these kinds of short-term, volatile price moves.
The main measure of this, the trimmed mean, fell half as much as the headline and at 3.5 per cent it remains uncomfortably above the RBA’s goal.
Gotta serve somebody
Adding to the concern is services inflation.
It was the cost of goods, many of which are imported, that drove the initial spike in inflation from late 2021 to the end of 2022, as stimulus-fuelled demand collided with COVID-affected global supply chains.
The increase in goods prices continues to slow — precipitously you might argue, as annual inflation in this group more than halved between June and September, again in part thanks to power bill subsidies.
However, the increasing price of services actually re-accelerated, albeit it ever so slightly, in the September quarter.
At 4.6 per cent over the past year, the rising price of services such as insurance, childcare, rents, healthcare and, yes, even haircuts, is what is keeping core inflation outside the RBA’s comfort zone.
Worse still, services are the main component of “home-grown” or “domestic” inflation.
The RBA looks more closely at this part of the figures because its rates decisions have their greatest effect within Australia and it is worried that the domestic economy is still running too hot for a rate cut that might add fuel to the fire.
With unemployment remaining close to 4 per cent and plenty of jobs still being added to the economy, most economists agree that it’s hard to see the case for a rate cut this year.
“Quite simply, service sector inflation right now isn’t compatible with meeting the RBA’s 2-3 per cent inflation target on a consistent basis,” concludes Indeed’s Asia-Pacific economist and former RBA boffin Callam Pickering.
“Australia’s inflation problems continue to be home-grown and recent government policies may help create the illusion that the problem is solved, but that’s far from the truth.
“It’s difficult to see the RBA cutting rates when service sector inflation is still so high, productivity growth so poor and the Australian labour market so tight.”
Michele Bullock an unlikely Santa
RBA governor Michele Bullock is unlikely to oversee an interest rate cut before the new year. (AAP: Dean Lewins)
The people who gamble real money on these things agree with the pundits.
According to Bloomberg’s analysis of the futures market, the odds of a Melbourne Cup Day rate cut are now roughly equal to the biggest roughies in the field for that race, at less than 1 per cent.
The chance of a pre-Christmas gift from the RBA to borrowers is less 20 per cent, down from close to 30 before the latest inflation data.
What’s more, the chances of a February rate cut, which is what the majority of local economists have recently been forecasting, have gone from better than 60 per cent this morning to around 50-50 as I write.
And this is where you might be able to do your indebted family and friends a favour by being a tight-arse this Christmas.
“Consumer spending is now pivotal for both the RBA and businesses alike,” notes RSM economist Devika Shivadekar.
“As we approach the year-end, upcoming retail events like Black Friday, Cyber Monday and Christmas present prime opportunities for elevated spending.
“Whether the trifecta of easing inflation, government subsidies and tax cuts, and major sales will drive demand to a level that prompts the central bank to further delay its rate cut is still uncertain.”
And even if turning Scrooge this Christmas doesn’t accelerate a rate cut from the RBA, at least it will mean you’ve racked up less festive season debt to pay interest on.