The inflation pulse has accelerated, quickening the heart rates of borrowers and maybe even the folks who set interest rates.
Market sentiment has dialled up a few notches the possibility of another hike in the Reserve Bank’s cash rate in August.
Jim Chalmers is trying to settle the nerves of indebted families during a cost-of-living crunch. The Treasurer says overseas experience shows inflation can “zig and zag on the way down”.
The last part of the disinflation journey will be like a family retro road trip, with its “are we there yet?” chorus from the bench seats in the back.
Last week, Michele Bullock said a lot needs to go the central bank’s way to get inflation into the 2-3 per cent target zone.
At this slow rate of progress, the monetary road trip is going to run a bit longer, with the driver’s knuckles turning white while anxiously gripping the steering wheel.
The latest monthly reading on the consumer price index, although a partial view, is not a good omen for those who are hoping for a less restrictive setting of monetary policy by the RBA board.
The measure of underlying inflation known as the trimmed mean increased to an annual rate of 4.4 per cent in May, from 4.1 per cent the previous month.
That must dent the confidence the RBA board would have that inflation is moving sustainability towards the target, at least until it gets a clearer reading from the quarterly CPI in five weeks.
The column is getting longer of factors that suggest demand, even though it is growing at a dismal rate, is outrunning the economy’s ability to supply the level of goods and services people want.
Economists point to strong population growth, rents, big-build public works, demand for health services and insurance premium hikes as contributors to high and persistent inflation.
There’s not a lot the RBA can do about any of those things, made worse by loose federal and state government spending, which the board called out a week ago as a factor in its ongoing interest-rate deliberations.
Analysis by Westpac economists reveals a $60bn jump in federal and state government spending in the coming financial year will add to inflation and risks keeping interest rates higher for longer.
From Monday, the rejigged stage three tax cuts will deliver a boost to the take-home pay of every worker who pays tax.
It’s a welcome return from Canberra of bracket creep but also another risk to inciting demand pressures, never mind that everyone from the RBA and Treasury down has factored into their inflation forecasts the coming $23bn in tax relief over 12 months.
The central bank’s aggressive policy moves over the first 18 months of its monetary squeeze, pushing its cash rate from near zero to 4.35 per cent, is obviously working.
Inflation is off its peak.
The question is whether the “painful squeeze” on family finances, as RBA assistant governor Christopher Kent put it on Wednesday, will be enough tightening to get the job done. “While recent economic data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation,” Kent said, echoing the official line.
“Hence, with regards to the path of interest rates, the Reserve Bank board is not ruling anything in or out.”
Bullock says it’s going to be a “slow grind” to get inflation down, one where there will be rushes of blood and perhaps even more pressure on financial wounds.
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