Why inflation trick won’t work

The idea that Reserve Bank governor Michele Bullock is going to rush out an interest rate cut because of the budget’s $300 energy rebate inflation trick is silly.

Reserve Bank Governor Michele Bullock. Picture: Jane Dempster/The Australian.

The idea that Reserve Bank governor Michele Bullock is going to rush out an interest rate cut because of the budget’s one-off, tricked up cut to the headline inflation rate is as silly as believing she will rush to hike rates because of all the spending the budget pumps into the economy.

Actually, it’s sillier.

What has gone completely missed is that the $300 energy rebate won’t only deliver a cut in the headline inflation rate, it also builds in an exact countervailing increase to the inflation rate.

Yes, the way the government is structuring the $300 – staggering the payments into four $75 blocks – aims to postpone that measured countervailing inflation rate increase into 2025.

And it indeed ‘hopes’ it sort of gets lost in the statistical wash.

Let me spell all this out by showing what would have happened if the $300 was all paid on the first - say electricity - bill in the September quarter.

Yes, that would have slashed the quarter’s headline inflation rate – the way the ABS measures it.

But what would then happen in the December quarter, when there was no rebate?

The ABS-measured electricity prices would go up by $300. The measured headline inflation rate would go up by exactly the same percentage as it had fallen in the previous quarter.

So, what actually happens with the four $75 payments?

Yes, the first one ‘cuts’ electricity prices and the measured headline inflation rate.

But what happens with the second $75 payment?

It has zero further impact on bills and measured electricity prices and measured inflation. It just maintains the artificial cut delivered by the first rebate.

The same applies to the third and fourth payments as well.

And then after that, when there are no more rebates, statistically-measured electricity prices and the headline inflation rate and electricity bills would all go up by whatever the first $75 rebate had ‘cut’ them.

That is, unless the government then delivered another $3.5bn rebate, crediting another $300 to every household and business next year.

What? And every year after that, just to ensure the $75 cut in bills becomes permanent?

It would be a very expensive way to deliver the promised $275 cut in power bills. And indeed, it would only deliver barely a quarter of the promise anyway.

I have to further say I find it hard to believe the first $75 is going to cut the CPI by all of 0.5 per cent in one hit, in the September quarter.

But as they say, we will find out, when we – and the RBA, and Treasury – get the September quarter inflation data at the end of October.

Well before then, Bullock and her board will have made their critical interest rate decisions.

When Bullock says the RBA isn’t ruling anything in or out; she is being very transparently honest with us.

She is really telling us that she – and the broader RBA – just really do not know how all the things impacting on the economy and inflation are going to break.

The energy-inflation trick is just one of them; and probably the least important.