RBA, Treasury clueless on rising inflation and rates

Both the Reserve Bank and Treasury predict – assume, hope, guess – that inflation will just go away when we tick over into 2023.

The Treasury building in Canberra. ‘Even in the December mid-year update, Treasury was still forecasting inflation would only be 2.75 per cent over the 2021-22 year. It’s going to be at least 4 per cent.’ Picture: NCA NewsWire / Gary Ramage

We are in the process of entering an utterly unprecedented period of both rising inflation and rising interest rates – and I have to say neither the Reserve Bank nor Treasury have a clue.

Both predict – assume, hope, guess, throw a dart at a dartboard where all numbers over 3 have been removed – that after surging through 2022, inflation will just miraculously go away when we tick over into 2023.

In the budget, Treasury forecast (CPI) inflation of 4.25 per cent in the year to this current June quarter, falling – miraculously and oh-so conveniently – to 3 per cent in the June 2023 year and then to 2.75 per cent in the June 2024 year.

All sorts of conveniently nice – essentially fiscal fantasies like a falling budget deficit – flow from such “forecasts”, but we will leave them aside for the moment.

In its most recent but now way out-of-date – indeed, they were outdated when they were released – forecasts in February, the RBA predicted a similar if somewhat slightly more embarrassingly wrong inflation path.

The RBA predicted inflation of just 3.75 per cent in the year to the June quarter, falling, again miraculously and oh-so conveniently, to 2.75 per cent in the June 2023 year and staying there through the June 2024 year.

Well, anybody who’s been in a supermarket in the recent past would probably be able to suggest these numbers are likely to be on the low-side, unless we are about to plunge into an immediate, deep recession.

In the six months to December inflation has already added to 2.1 per cent. It will go well over 3 per cent for the nine months to March – we will see the figures at the end of April – and it could approach 5 per cent for the June year.

So that’s the current state of play; why will it then fall back to or indeed below 3 per cent over 2022-23? Just because.

Actually, that’s me riffing. Both the RBA and Treasury will and will continue to give us pages on oil prices and Covid-generated supply bottlenecks and the impact of Russia’s invasion of Ukraine, especially on commodity prices.

But in truth it comes back to: just because. They both are as clueless about what might – what is likely to, what will – happen to inflation in 2022-23, far less 2023-24, as they were about what would happen to inflation in this year, 2021-22.

A year ago, in May 2021, Treasury forecast inflation would be 1.75 per cent in this 2021-22 year.

It’s going to be at least 4 and quite possibly close to 5 per cent.

Do you think – do you really thunk – that’s just the slightest bit of a miss? Predicted 1.75 per cent, out-turn possibly 5 per cent?

Indeed, even in the December mid-year update. Treasury was still forecasting inflation would only be 2.75 per cent over the 2021-22 year.

I must stress that Treasury can’t blame it all on the – literally unpredictable – Russian invasion of Ukraine. Almost all the inflation we’ve got right now was already locked in before Ukraine.

The invasion just kicked it up a bit – and added a further layer of uncertainty that, again, neither Treasury nor the RBA seem to comprehend.

So how did the RBA do?

In May last year it forecast inflation of just 1.25 per cent in 2021-22. Outcome, just to remind you – and the residents of that building at the top of Martin Place in Sydney – will be between 4 and 5 per cent.

It also saw inflation struggling to get up to 2 per cent by June 2023.

By November the RBA had joined Treasury in lifting its forecast for the June 2022 year to 2.75 per cent; but, again, both saw inflation then just miraculously going away into 2023 and 2024.

Do you begin to see some clue to why the RBA has been so – now approaching recklessly irresponsibly – slow to start raising rates away from the Covid-emergency 0.1 per cent?

So, notwithstanding the RBA not seeing it coming, we find ourselves facing seriously rising inflation that is not just going to disappear when the clock ticks over into 2023, and rising interest rates, here, in the US and inevitably everywhere.

That is, or else all the central banks just abandoning any attempt at responsible monetary policy and essentially just letting inflation rip. Something, I have to say, I cannot rule out – given how utterly corrupt and incompetent the US Fed is.

Indeed, Wall St parties on, knowing Fed head Jerome Powell has its “collective back”. Or it could do the simple arithmetic that the Fed is clearly incapable of doing and doesn’t want to anyway.

US Inflation is approaching 10 per cent; if this new “tough-talking”, all “hairy-chested”, Fed delivers “all” the rate rises it’s predicted, the Fed rate might get to 2.5 or even 3 per cent.

Average corporate revenues and profits going up 10 per cent; a basic interest rate of even 3 per cent; that leaves corporate profitability and so share valuations untouched.

The last time we had seriously rising inflation and rising rates in Australia was running into the GFC.

Home loan borrowers haven’t seen a rate rise in nearly a dozen years; with the average home loan lasting only seven years, that means the vast majority of borrowers have never got a letter from their bank telling them repayments were going up.

Then add all the other seismic shifts playing out: the reverberations from the – continuing – Covid reality and all the things that governments and central banks did; the China of 2022 which is very, very different to that of 2019; and of course Ukraine.

Overhanging everything is the massive money printing and the share and property bubbles built by the zero rates and multi-trillion dollar money printing.

A simpleton would have some faint sense that we are not going to track the seamless path to broad sunlit uplands “forecast” by both Treasury and the RBA.