The Reserve Bank has to navigate a path away from inflation but the economic signals are months old | Peter Hannam

While backward-looking labour market data is still robust, property prices provide a taste of the deteriorating outlook

A major challenge for central banks – and treasurers – is having to steer the economy down sometimes treacherous tracks using dated data, leaving them peering as much in the rearview mirror as through the windscreen.

Reserve Bank governor, Philip Lowe’s destination is getting inflation back into the central bank’s preferred 2% to 3% range without stalling the economy. On Tuesday, that plan translated into the fourth hike in the official interest rates in as many meetings.

However as CBA’s chief economist, Gareth Aird, notes – inflation is a lagging economic indictor. That’s arguably even more of an issue in Australia as we only get quarterly readings for key measures, such as consumer prices and wages.

Lowe’s comments accompanying Tuesday’s 50 basis point increase in the cash rate to 1.85% encouraged economists and investors to expect the RBA won’t need to hit the rate rise brakes quite as hard as feared just weeks ago.

Inflation, for instance, would peak at 7.75% in December, Lowe said, providing a forecast in line with Treasury’s, that was cited last week by Treasurer Jim Chalmers in his economic statement.

GDP growth, too, would lose a full percentage point to come in at 3.25% in 2023 from the RBA’s most recent published estimate in May. Rising interest rates, of course, are expected to have some bearing on that slower growth.

Still, Aird noted there is now “a significant dichotomy in the domestic economic data” that will last for months.

“Backward-looking labour market data will remain robust, wages growth will accelerate and inflation will remain elevated,” Aird said. “But forward-looking data has deteriorated and further weakness is expected, [including] consumer sentiment, home prices, housing lending and building approvals.”

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We’ve had some taste of that deteriorating outlook lately. Property prices nationally at the end of July were heading south at a pace not seen since the start of the global financial crisis in 2008, CoreLogic reported on Monday.

For Sydney, the rate of declines since the peak in January exceeds even that of the sharp downturn in the early 1980s.

The Australian Bureau of Statistics also reported on Tuesday the value of new housing loan commitments dropped 4.4% in June alone, seasonally adjusted. New investor loans for housing fell 6.3%, while the value of new owner-occupier loans sank 3.3%.

The value of new investor loan commitments remains double the pre-pandemic levels of February 2020, and those for new owner-occupier loans remain 50% higher, the ABS said. Still, the trend is going one way.

“We expect rising interest rates and high inflation to push down demand for home building and borrowing in the coming months,” ANZ’s senior economist, Adelaide Timbrell, said prior to Tuesday’s RBA rate hike.

Fortunately, the spike in inflation so far is yet to ignite expectations that a spiral upwards is guaranteed.

This chart too will be pleasing to those worried that 'inflation expectations' are rising. At least in the past week, they've retreated and the rolling four-week gauge is also trending lower. (Source: @ANZ_Research, Roy Morgan.)

— Peter Hannam (@p_hannam) August 1, 2022

On 17 August, wage numbers for the June quarter will land. The RBA has its own liaison officers in the field trying to gauge what’s happening to salaries, particularly as it predicts the labour market to keep tightening further than the June jobless rate of 3.5%.

Taking the long view, the RBA’s “central” forecast for unemployment is that it will return to be “around 4% at the end of 2024”, it said in Tuesday.

Much sooner, though, we will have a clearer sense of whether workers are able to convert the scarcity of employees into higher wages.

So far, of course, pay packets have not been keeping up with inflation. The ACTU also warned on Tuesday they aren’t chuffed at having to shoulder higher loan repayments.

“The RBA’s aggressive approach to fixing inflation is hurting workers, who are already facing the brunt of the cost-of-living crisis and ignores the record profiteering of big businesses that are a key driver of inflation,” ACTU secretary Sally McManus said.

“Reform of our bargaining laws to deliver wage growth is urgent,” she said. “This is the lever the government has at their disposal to rescue a generation of Australians from lower living standards.”

We’ll get the RBA’s own estimates of how wages will fare in Friday’s release of its quarterly statement on monetary policy. That’s one forward-looking number that will be closely scrutinised by many


Peter Hannam

The GuardianTramp

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