Inflation surge forces a big RBA Cup Day

RESERVE Bank Governor Philip Lowe and his team are going to have to do some very serious thinking ahead of and on the morning of Melbourne Cup Day.

No, not which horse to back. And no, not what they actually do at their second last meeting for the year.

That is locked in and won’t be changed by Wednesday’s ‘surprise’ higher inflation numbers.

They were certainly no surprise to me.

This is what I wrote almost a month back on October 4.

“Inflation is coming, ready or not. Indeed, it’s already here if somewhat muted for the moment by the lockdowns in NSW and Victoria.”

The RBA will do exactly the same things it did last month.

It will leave its official interest rate at the all-but zero 0.1 per cent.

It will continue to target the early 2024 bond yield at the same 0.1 per cent.

And it will keep buying $4bn of government bonds a week.

It is what Governor Lowe says that will be, that now has to be, very different.

Bluntly, the time I have certainly been waiting for has arrived: when he has to ‘moderate’ his ‘promise’ not to raise that official rate until early 2024 at the earliest.

He certainly has to say some-thing; on the Friday after the meeting the RBA releases its latest detailed analysis of the economy – and, most pointedly, its forecasts. To put it politely, its current inflation forecasts, from early August, have been blown out of the water by the 0.8 per cent September quarter headline inflation number and the almost as high 0.7 per cent underlying inflation measure.

In August the RBA forecast 2.5 per cent headline inflation for the December year and 1.75 per cent underlying.

Well, the headline rate for the first nine months has already added up to 2.2 per cent. It will blow through 3 percent for the year.

The underlying rate has already added to 1.6 per cent for the nine months and will clearly go past 2 per cent – maybe even, significantly past, 2 per cent – for the December year.

Self-evidently there is no way the RBA could release higher – now, realistic – inflation forecasts on the Friday, and maintain its “no inflation and no rate rises until 2024 to see here” rhetoric on Cup Day.

The real issue is whether the RBA has to shift big and shift fast; to recognise that the rising inflation roiling around world, including in our nearest neighbour New Zealand, is also building here.

NZ reported 4.9 per cent inflation for the September year (ours was 3 per cent). The NZ Reserve Bank promptly doubled its official rate, true only from 0.25 to 0.5 per cent.

The big thing about Wednesday’s 0.8 per cent headline quarterly inflation was that it came with more than half the economy locked down for almost the entire quarter.

In 2020, when the whole economy was locked down in the June quarter and GDP slumped 7 per cent; prices plunged by a thumping 1.9 per cent, in just that single quarter.

We don’t get the September quarter GDP number until early December, but it will be negative at least 3 per cent.

Yet we still got 0.8 per cent inflation.

It flowed out of the same pressures impacting globally – surging energy prices and supply change hold-ups – but also local pressures.

With the whole economy now into a post-lockdown mini-boom, and worker shortages – inflation will surge past 1 per cent for the quarter and hit 3.5 per cent, or higher, for the year.

If this does feed into wages, the RBA is going to find itself way, way behind the curve.

It has to start catching up, and fast – starting with its language on Cup Day.