There’s good news in US inflation and our jobs data

The latest US inflation data and our own March jobless numbers are important ‘good news’ pointers to the likely path of interest rates on both sides of the Pacific.

Both the latest US inflation data and our own March jobs and jobless numbers are important – ‘good news’ -pointers to the likely paths of interest rates on both sides of the Pacific, and so the investment outlook for both shares and property, and also obviously the economy.

The increasing – as I’ve been explaining for months, ‘hiding in plain sight’ – evidence of significantly lower US inflation could see the Fed finally pause its rate hikes at its next meeting at the start of May.

Or, at the worst, go for another 25-pointer as its ‘last and final’’. It’s a meeting which comes hard on the heels of our own Reserve Bank’s meeting, which will likely deliver a second rate pause provided our March quarter inflation data are at least half-decent.

In the case of the Fed a May pause – even more, a 25-pointer - would dramatically raise the likelihood it was ‘done’ with rate hikes.

It would even open the door to the first rate cut before the end of the year.

That prospect would clearly be a huge plus for Wall St and so our market.

The single – huge difference – between the two states of play is that the Fed’s policy rate of 4.75-5 per cent is now broadly level with the full-year US inflation number of 5 per cent.

But if we take the nine months since inflation has fallen sharply in the US and annualise that we get an inflation number more like 3.2 per cent. That makes the near-5 per cent policy rate clearly and consequentially restrictive. That should become far more evident as the big monthly inflation numbers from mid-2022 progressively fall out of the full-year US inflation number.

RBA Governor Philip Lowe. Picture: NCA NewsWire / Gary Ramage

It’s very different in Australia. Philip Lowe’s softly-softly approach – despite the media and other hysteria – means the RBA’s 3.6 per cent policy rate is way below inflation of 7 per cent plus.

Even accounting our bigger reliance on variable-rate mortgages, our much bigger household debt, and the so-called unrolling fixed-rate cliff, this is not restrictive in real terms.

But, just as US inflation accelerated well before – and should have been a telling pointer to – our subsequently accelerating inflation, so the falling US inflation also points to something similarly likely here.

Segue to what has been happening and might happen to downunder wages; and happens in the context of our abysmal productivity, and surging, soaring, immigration.

Right now, the ABS jobs data shows, we are in a bizarre, highly unstable, equilibrium, holding a wages surge at bay.

Every month tens of thousands of migrants pour in. They provide much-need labour and help cap wage increases.

Yet at the same time they boost demand across the board, and most potently in the rental and housing markets.

They inevitably also worsen our dismal productivity – we get more output from more workers not from workers producing more.

At the moment it’s in uneasy balance: record low jobless but aggregate wage growth still sub-4 per cent despite the higher inflation.

If it holds, great for inflation and rates – and investments.

But you sort of feel it has to snap, someday, badly.

Originally published as There’s good news in US inflation and our jobs data