This morning the economic news agenda is being set by a place down under and in particular by this.
The monthly Consumer Price Index (CPI) indicator rose 4.0 per cent in the 12 months to May 2024, up from 3.6 per cent in April, according to the latest data from the Australian Bureau of Statistics (ABS).
The most significant contributors to the annual rise to May were Housing (+5.2 per cent), Food and non-alcoholic beverages (+3.3 per cent), Transport (+4.9 per cent), and Alcohol and tobacco (+6.7 per cent).
So we have a rise in the annual figure which means that the pressure on the Reserve Bank of Australia is building. Back on the 7th of May it told us this.
Recent information indicates that inflation continues to moderate, but is declining more slowly than expected.
That has not had a good morning and whilst this is a monthly rather than a quarterly number it is not following what we were told. Back on the 7th of May I pointed out this.
So whilst others are contemplating interest-rate cuts Australia may yet see another rise.
The Reserve Bank of Australia
We can review this in the light of the words of Deputy Governor Kent who spoke in Melbourne earlier.
The tightening in monetary policy over the past two years is underpinning restrictive financial conditions in Australia. This is contributing to slower growth of aggregate demand, thereby helping to bring the level of demand into better balance with supply and lower inflation.
It was not the best of days to be claiming that! But there is more and let me remind you of this from my article on May 7th.
The RBA does not mention the money supply in its release but its last chart pack showed broad money growth to be around 5%. Bringing it up to date I note that in March broad money went above US $3 trillion for the first time. But more applicable for our purposes the annual rate of growth is 4.9% having seen monthly rises of 0.7% in February and 0.3% in March.
The money supply is not showing that things are restrictive and seemed to be suggesting another push. I can update that now with the April figures which were 0.4% on the month raising the annual rate to 5.1%. So if we look ahead 18/24 months for inflation to be running at 2% we would need growth of 3% and the latter does not look likely as we recall Australia is in a GDP per capita recession and depression. So there is a clear risk for inflation two years ahead.
So things are not going very well for the claim that policy is restrictive and presumably inadvertently he confirms this.
While recent economic data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation.
Central bankers use the word “vigilant” when they fear things are going wrong due to their actions but want to make it look like they have been on the case. We get a confirmation of the public relations effort here.
Monetary policy is the key determinant of financial conditions for households and businesses. Since May 2022, the RBA has raised the cash rate target by 425 basis points.
As you can see he is presenting himself as a doughty inflation warrior. His problem is that it is starting to look like it is not enough. As an aside central bankers seem to have made a pack decision that basis points sounds so much more macho than percentage points as 425 basis points is the new 4.25%.
Theory beats Reality Again
You might think that after the disaster where theories about Transitory inflation went so wrong, you would throw away the failures. But no we have an effort to measure things via something we er can’t measure!
One way to gauge the stance of monetary policy is to compare the cash rate with estimates of the nominal neutral interest rate.
We do get a confession of this if you follow closely.
Definitions of the neutral rate vary,
It is one of those concepts like marking your own homework as the neutral rate as measured by Deputy Governor Kent is below the actual one and policy is restrictive.
but in essence it is the level of the cash rate that would neither stimulate nor restrain demand; in other words, it would underpin a balance between demand and supply of goods and services and in the labour market, with inflation consistent with the inflation target.
That is the numerical equivalent of a word salad. Let me pick out one area which I highlighted on May 7th.
Putting it another way real wages should be rising as we have more than full employment.
Except they have fallen and are not catching up much (made worse by the inflation rise). I pointed out back then the UK had problems with its labour market figures and since then the US has produced a non-farm payroll release where employment was strong ( Establishment Survey) and falling ( Household Survey) at the same time. So all the available evidence suggests that our knowledge of the labour market us struggling. But that is ignored and we get this.
In May, the median estimate among market economists implied that the cash rate was around 1 percentage point above the nominal neutral rate.
Note how is using others as a backing for his fantasy. Although I note that he then feels the need to cover his tracks.
That said, estimates of the neutral rate are subject to considerable uncertainty, so the extent to which monetary policy is restrictive is unclear. Also, the neutral rate can change over time.
Should things go wrong then this is the bit that future speeches will refer to. After a suitable delay the neutral rate will be back as it is o easy to manipulate.
Last thing I remember, I was running for the doorI had to find the passage back to the place I was before“Relax, ” said the night man, “We are programmed to receiveYou can check out any time you like, but you can never leave” ( The Eagles )
We can return to the money supply issue because we are presented with a “dashboard of indicators” with eleven different measures and not one of them is the money supply. Can anybody think why?
Comment
One definition of intelligence is that you learn from your mistakes. Yet we see that central bankers keep making the same ones and in particular they keep preferring theory to reality. That is added to by speeches like this which are presented as research into the facts but only cover the facts which suit the narrative. Indeed they also at times look to change the narrative as I note this from Mohammed El-Erian.
The inflation dynamics are more complicated than most realize; and We should be more open-minded about the inflation targets given secular realities.
Can anybody guess which way we will have to be more “open-minded”?!
The real issue for me is less the inflation rise today as the situation with the money supply. That does not show that policy is restrictive. Another measure used to be that you needed to get interest-rates above inflation for a sustained period with some arguing it needed to be 2% above. Then we have the issue that I looked at on the 5th of this month which is the way the Aussie economy is struggling. Things look really rather stagflationary at the moment. Whilst we are looking at headaches for the RBA then the rise in the 3 year yield by 0.2% to 4.15% makes its QE portfolio look even worse.
Let me finish with some hope as many Aussies were wise enough to ignore the lower for longer Forward Guidance from their central bankers.
Pass-through has been a bit less than in the past because of the high share of mortgages fixed at low rates during the pandemic.
Notayesmanseconomics's Blog 
Hello Shaun,
Seems we enter the Banking Rabbit Hole again. Whatever they say they speak with forked tongue !
Forbin
that’s because your rabbit hole is really a snake pit.
“Another measure used to be that you needed to get interest-rates above inflation for a sustained period with some arguing it needed to be 2% above. “
That is so old hat now, central bankers and governments now prefer to just say inflation is back to 2% when it clearly isn’t as what can anyone do about it if the MSM never call them out on it?, oh the bond market was supposed to act as the inflation policeman as well, but seems to have taken the Kool Aid and believes the official rates now as well.
So stagflation can continue, the everything bubble(apart from commercial real estate) can continue and governments can keep borrowing with no intention of paying it back, we can let in a million immigrants into the country every year with no provision as to how we are going to house them, or increase funding for public services to adjust for the huge increase in demand – the current budgets will just have to cope!
This is the new normal folks.Struggling to pay the rent/mortgage, buy food or heat your place in winter? – well that’s just you, everyone is bathing in the warm glow of wealth from free money.
The only thing that confuses me is why didn’t we do this decades ago?
And what was Daves austerity for
Collapse of the Yen continues, it is now lower than the last time the BOJ intervened, all that money spent to achieve…………nothing. But hey we’re talking central banks here where if something doesn’t work – you just keep doing it over and over again, the losses? Well they don’t matter – there are no consequences – for them – the currency then collapses and causes huge inflation for the Japanese consumer who is told by their msm it is caused by lots of extrnal factors and the fall in the yen!!!
Hi Kevin
It will be a rough morning in Tokyo. It’s a bit after 6 now so I would expect the dealing team to be building up at the Bank of Japan. They will be waiting to see what the finance ministry wants to do about the Japanese Yen falling another big figure to 160.75.
That effort to talk the Yen up by Finance Minister Suzuki had no impact at all.
OT but on the theme of inflation, a UK supplier of bikes had their AGM today and voiced their concern over container prices trebled in the last few months due to middle east war.
With most of our white goods and electronics imported this could see more inflation in the UK and a number of forecasters have already forecast inflation to rise in the UK later on this year.
The conservatives claiming they have already gotten inflation down to 2%, which is a lie because it is the market itself and the BOE responsible for the inflation target, may have brought forward the election date because they know inflation will probably rise again.
Lets also not forget the BOE keep stalling on cutting interest rates.
Peter, I think now inflation as far as governments are concerned is what they say it is – the whole system has got that rotten and corrupted that coming out with such an easily proven lie doesn’t deter them. In fact once you get away with something as barefaced as telling someone inflation is 2% when people see prices still soaring across virtually every sector, just keep lying don’t stop!!!!!
“So whilst others are contemplating interest-rate cuts Australia may yet see another rise.“
Australia may be far from on its own.
We have had exercises by our reservists (TA/RNR/RAF Reservists) to test their combat readiness:
Army chiefs plan biggest reservists mobilisation exercise in 20 years (msn.com)
What happened 20 years ago? The Gulf War.
Hi therrawbuzzin
The issue is that it is only 10,000 reserve soldiers so in terms of manpower these days there is little we can do. After all the stupid wars we got into in the Middle-East that is not all bad. Is anywhere better for it?
I follow some of the naval blogs and we have some good equipment but can’t even crew some of the ships. I knew Capita as Crapita quite some years ago but some clown put them in charge of naval recruitment and you can guess the rest…
More on Dr Mosley:
Dr Michael Mosley ‘suffered’ after making a huge decision before death (msn.com)
So are we leaning towards suicide now? The more the MSM try to convince me that Dr Mosley’s death was an accident, the less I believe it.
He said PPE was really hard and suffered doing it? What! then changed to a medical degree(along with post grad training is seven years of monumental slog) which along with Physics, engineering, maths, electrical engineering is possibly the most difficult choice of degree to take.
Many people in politics and media did PPE and looking at them and how they turned out suggests to me it is possibly an easy option for a less academically and hard working student to take????
PPE is the golden ticket to a career in politics and of course all the corruption that goes with it, was this the “suffering” he mentioned, the fact that he knew that his career path would mean he would have to betray his principals at some point?
The fact he went out in that heat with an umbrella marks him out as a truly eccentric classical englishman to me, mad dogs and – you know the rest, perhaps his medical training gave him the false confidence in his attempt to walk long distances in that heat?
Great blog as usual, Shaun.
Yesterday and today Statistics Canada released the May CPI update for Canada. (For some unaccountable reason, the CPIXFET and CPIW core inflation updates are released a day after the other estimates.) Doug Porter and other analysts are upset because the inflation rate is up from last month, going from 2.7% to 2.9%. Doug is not predicting another drop in the Bank of Canada’s overnight rate until September. I don’t see why this is such a big deal really. The CPI excluding mortgage interest, which should be our target inflation indicator, only went from 1.84% in April to 2.08% in May, and that 2.08% is the highest the inflation rate has been so far in 2024. I won’t make predictions on those things, but I am really hoping for another interest rate cut by the Bank of Canada in July.
The rise in the annual inflation rate was mainly due to services prices, including travel tours, equivalent to the UK holidays component. Say what you want about the UK holidays index, at least the members of the RPI Advisory Committee who recommended the current ersatz seasonal weighting approach recognized that this was a highly seasonal good that required some form of seasonal weighting. Sadly, this has never been the case for the Canadian travel tours index, which has always adopted an annual-basket approach. Until the September 2013 CPI update the index could only change in January, February and March, as only winter tours in the United States, Mexico and the Caribbean were priced. A big 12-month change, or any change for that matter, in May was impossible. The methodology change introduced with the September 2013 update added European destinations so there was pricing in every month of the year. This would have been an appropriate time to introduce seasonal weighting in the series, the more so since seasonal weighting had been introduced from top to bottom in the revised farm product price index more than a decade previous in 2001. Sadly that was not done so the annual movements of the new series are questionable. For what it is worth the annual inflation rate for travel tours was 6.9% in May, up sharply from 0.5% in April. Note that this year Catholic and Protestant Easter were held earlier than usual on March 31.
Thank you Andrew
I was going to look at Canada as well today, but in the end there is so much going on concerning Australia. I see that Statistics Canada echoed your argument.
“On a monthly basis, the CPI rose 0.6% in May, largely stemming from an increase in travel tours. On a seasonally adjusted monthly basis, the CPI rose 0.3% in May.”
Others are worried about what is happening to rents?
“On a year-over-year basis, rent prices rose 8.4% in Ontario in May, up from a 6.1% increase in April. This contributed to faster growth in the national rent index, which rose 8.9% in May, outpacing growth in Ontario for the ninth consecutive month. A higher interest rate environment and population increases both continue to put upward pressure on the rent index nationally.”