Inflation is being driven by things unaffected by interest rate, so there is no reason for the RBA to raise rates in November
The latest CPI figures showed inflation grew 5.4%, down from 6% in the June quarter and almost a third below the peak of 7.8% at the end of last year. And yet commentators seem desperate for the Reserve Bank of Australia to raise interest rates next month to show it is tough on inflation. But raising rates now would not be tough, it would just be cruel.
The annual growth of inflation is falling quite quickly – down from 7.8% at the end of last year. But because the quarterly growth of inflation rose in the September quarter, a numbe rof commentators and economists have been suggesting that the Reserve Bank should raise interest rates in two months.
But when you examine the drivers of inflation in the September quarter, there is little that would have an impact from higher interest rates.
Automotive fuel prices accounted for 20% of the growth in inflation in September – that is completely unaffected by rate rises given that it was all due to higher world oil prices due to OPECD restricting supply. Similarly rental prices, electricity, property rates and charges, insurance, tobacco and beer prices have nothing to do with interest rates. Even the cost of building a new home is driven mostly by the increased cost of construction materials from overseas.
Crucially in the September quarter the cost of “non-discretionary item” rose 1.4% while the cost of “discretionary” item rose just 0.7%. Non-discretionary items are things which you cannot avoid paying (at least in the short-term). In effect those price rises have the same impact on consumer spending as do rate rises – they reduce the ability of people to spend money on things in shops and on discretionary services.
Had the RBA raised interest rates more in the September quarter there would have been negligible impact on the main drivers of inflation, raising them in November due to these latest figures would just be cruel and hurting people whose real wages continue to fall.
The cost of mortgages is soaring and households are spending less in the shops – the Reserve Bank should hold off on raising rates again next week
Wages growth is rising slowly and inflation is falling faster than expected, and yet the RBA decided to hit the economy again with another rate rise.
The signs are already evident that household consumption is falling despite most mortgage holders yet to feel the full effects of the rate rises. The Reserve Bank however believes more pain is needed.
Home loans have fallen sharply in the past year, and the rate rises are clearly having a major impact. As such the Reserve Bank needs to wait before raising them again.
Perhaps as much as a third of the rate rises since April have yet to fully hit the economy
Every now and then a window opens into the soul of the business community, and we catch a glimpse of the values and goals that shape the actions of the captains of industry.