There still be inflation sea monsters ahead for Captain Bullock

There’s a scene in Russell Crowe’s best film, Master and Commander: The Far Side of the World, when his ship rounds Cape Horn.

He and his crew cheer heartily as the whipstaff suddenly swings above their heads to take HMS Surprise north, knowing that the worst of their journey is probably over.

Michele Bullock, who as captain of the Reserve Bank has had most mortgage holders swabbing the decks for two years, knows the monetary policy rudder has turned. But there’s still a rocky and dangerous trip ahead before anyone can declare victory.

RBA captain Michele Bullock knows the monetary policy rudder has turned.Credit: Louie Douvis

Inflation is tipped to be within the RBA’s target band of 2 to 3 per cent for a full year, inching down to 2.5 per cent by the June quarter next year. If that comes to pass, it will have been the first time in 13 years that the bank has had inflation in that band for four consecutive quarters.

Talk about “land ahoy!”

But Bullock has her monocular traced on something else. Underlying inflation – which pulls out the goods and services that are running super-hot or super-cold – is her destination.

Despite falling in the September quarter to 3.5 per cent, the bank believes underlying inflation will only slowly edge down to 3 per cent by the middle of next year (and 2.8 per cent by year’s end). The RBA’s sails aren’t yet billowing.

The bank’s monetary policy statement contained plenty of dangerous shoals for both sides of politics ahead of next year’s federal election.

Inflation may be in the RBA’s 2 to 3 per cent band until the middle of next year, but the end of the Albanese government’s energy subsidies means there will be a substantial price spike in the run-up to Christmas next year.

In other words, this reduced inflation could be just like a make-believe sea monster on the edge of a centuries-old map.

Opposition Leader Peter Dutton has his own issues. The Coalition is promising a steep cut in immigration which will, on top of Australia’s falling fertility rate, bring down population growth.

The bank warns the idea that fewer migrants mean less demand and lower inflation is wrong. It says slower population growth will reduce the economy’s supply capacity to such an extent it will not have a material effect on “the degree of spare capacity in the economy and therefore inflation”.

Both sides are warned that big-spending election promises, particularly around infrastructure, would prove problematic on the inflation front.

And while Donald Trump is not mentioned by name, his presence is like a shark, just below the ocean’s surface, with the Reserve warning of “heightened geopolitical risks and potentially large changes to the global trade and fiscal policy outlook”.

Captain Bullock maintains the current course will deliver lower inflation and lower interest rates. She just doesn’t want to declare mission accomplished yet.

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