Why 50 points now means less pain later

Domestic issues are starting to play a bigger part in the inflation calculation, but the RBA still needs to be decisive.

There are two important points to make about Wednesday’s inflation numbers that are absolutely critical to understanding where we go from here.

First, despite the media hysteria, they were not a surprise and they were even more certainly not an upside surprise – and both that was true most especially to the guys, non-gender specific, making the key interest rate decision Tuesday week.

At the start of November the Reserve Bank had predicted 8 per cent; the actual headline number was 7.8 per cent. Inflation in the December quarter came in slightly lower than the RBA had expected.

Indeed, Treasury got its prediction exactly right. It had forecast 7.75 per cent; and even more impressively, it had made that prediction, in the October budget, before seeing the September quarter CPI numbers.

As an occasional critic of Treasury forecasting, I feel obliged to say ‘well done fellows’, again of course non-gender specific.

It also wasn’t – or shouldn’t – have been a surprise to anyone else either. Are we supposed to not have noticed the prices of petrol, gas, electricity, airfares and those products we occasionally consume otherwise known as food? And then of course: etc etc?

This all leads to the second key point: what we saw Wednesday was all about yesterday inflation. What happened to the prices of all those things before Christmas, non-theologically specific of course.

It is what is happening to prices right now, and indeed prospectively through the year that is absolutely critical.

Absolutely critical, obviously, to overall inflation; absolutely critical to what the RBA does – or should do - with interest rates; absolutely critical to wages, to living standards, to the state of the economy, investments, property.

In short, to your entire future.

And on that front, I have to bring you ... good and potentially great news.

But good news, which does not contradict my argument that the RBA has to go 50 points and not 25. Indeed, precisely because we are at one of those fundamental pivot points in history.

The global inflation outlook is looking surprisingly positive – as in; heading lower and perhaps sharply and suddenly lower.

The key driver is China. I don’t think people – and by that I mean economists – appreciate how dramatic, for the global economy, has been the abandonment of its Covid-zero policy.

It is in the process of dramatically unblocking all those supply chain disruptions which were such a big part of the global inflation story through 2022.

In 2023 we are going to see a flood of cheap product pouring back into the global market, very effectively building on the way inflation in the US actually all-but evaporated in the December half.

Yes, this will also tend to boost commodity prices – no bad thing, I might note for Australia.

But the potential for that to feed into inflation, blunting the overall inflation drop, is I think overstated.

The reason is largely Russia: that fears of Russia sending commodity prices to the moon are not happening.

We, and that means essentially Europe, have adjusted in both supply and price terms. In any event, the energy price rises were part of that ‘yesterday inflation’.

So, why shouldn’t the RBA just relax and let all these good times flow?

It’s not global inflation that threatens us, but a local wages breakout off the back of those yesterday inflation numbers and a still very tight labour market.

If wage rises do kick up to the 5-6 per cent range, or even worse, higher, we will be locked into a wages-prices spiral, irrespective of global inflation; and then face the prospect of serious interest rate pain, in a milder version of 1990.

In short, better another, say 100 points now – starting with 50 Tuesday week, than 200-300 points or even more desperately later.