Retail slowdown, easing inflation should rule out end of year rate hike

Michele Bullock has made her point about reining in inflation, but a slump in retail spending should kill off any thoughts of another rate hike next week.

Michele Bullock has made her point. The latest inflation numbers provide no basis for a further pre-Christmas rate hike and she – actually, her board - should not hike next week.

Indeed, the most important statistic out of the week was not the lower inflation number for October, but the seriously weak retail sales that surfaced the day before.

It was generally, simplistically, explained away as consumers holding back their spending for Black Friday through to Cyber Monday in November.

But that goes nowhere near explaining the huge, and I mean humungous, fall in retail spending over the year, when allowance is made for both inflation and the huge population surge thanks to the completely out-of-control immigration.

Retail spending in October fell 0.2 per cent over the month. It was up just 1.2 per cent in dollar terms over October 2022.

The inflation numbers told us that prices rose 5 per cent over the October year. That means retail sales actually fell by around 4 per cent in real – volume – terms.

But, over the year our population leapt a staggering 2.5 per cent or so. So, real per capita retail sales fell by over 6 per cent over the year.

That signals, that screams, serious slowdown in the economy.

A slowdown that is disguised, that is held tenuously at bay, by the migration surge and the equally out-of-control, and mostly mindless, infrastructure spending by government.

Broadly, crudely, but simply and very instructively, consumer spending across the economy – which is 70 per cent of all spending – is slowing sharply and inflation is already in the low-4s.

Now, I would certainly not say we are yet at the point where Bullock and her board should be

contemplating rate cuts.

Let’s see inflation actually print in the low-to-mid 4s for the December year. And head into the 3s decisively by mid-2024.

That – cutting inflation - remains her and the RBA board’s day job.

But she may have to start giving serious thought-time to the other half of her and the RBA’s mandate – under both the old and new, Chalmers, rules - unemployment.

My view that the Cup Day rate hike was probably the ‘rate hike too far’ is only reinforced by the October inflation numbers, showing a bigger than expected (but not by me) fall in the annual inflation rate to 4.9 per cent.

It was and should have been clear that the – actually, quite slight – kick-up in September quarter inflation was driven by a series of one-offs and in particular both energy prices and the national wage decision.

It’s important to get clear two things.

Yes, inflation won’t quickly go below 3 per cent. It will stay sticky in the 3-4 per cent range.

It will remain messy and difficult if wage hikes run at 4-5 per cent without clear and immediate productivity offsets.

But, very importantly – and positively – wage rises have not managed to chase the higher inflation of 2022. We do not face a wages-prices spiral.

On all levels, the next two months should be all about watching and working out what is actually emerging across the economy.