OK, there is no one left in the market who doesn’t believe the RBA will raise rates by 25bps in August to 6.00%. The question now is: will there be another 25bps this year?

It would be nice to find some consensus among economists, but then we’re talking about economists. FN Arena has conducted a straw poll and found that Credit Suisse, ABN Amro, GSJB Were and Macquarie say yes, Merrill Lynch, UBS and ANZ say no, TD Securities says probably, HSBC says unlikely, and Deutsche Bank wants to hear what the RBA says next week.

Helpful? Not really. So let’s look at what they had to say.

“Has your fruit bill actually gone up by 50%?” asks ABN. This is a relevant point. Personally, I haven’t bought any of my beloved bananas for weeks now, and I have been eating a lot more rockmelon which is much cheaper. What ABN is saying is that the CPI may have received a huge kick from a 250% rise in the price of bananas, but it doesn’t take into account the fact that most of us have stopped buying them.

Moreover, the banana thing is a temporary blip – something our Treasurer has been quick to point out. He has also pointed out that the other big effect was petrol prices, and that not all of the increase is being passed on. This is true, but there is evidence (probably more so in the PPI) that this has begun to happen. Anyway, Costello is a politician, so his opinion is not worth a bean.

ABN notes that when the post-cyclone banana crop ripens later in the year, CPI growth will lose a whole 0.5%. More generally, ABN suggests 6.00% will be enough for the moment to put a brake on the economy and on consumer spending.

The jump to an annual CPI of 4% yesterday was headline inflation. Of more importance to the RBA is core inflation. Take out fruit and petrol and the CPI only rose 0.6% yesterday to 3.00% – the top of the RBA range, but not above it. In fact, if you apply the RBA’s “trimmed mean” calculations, inflation is now running at only 2.8%, reports Merrill Lynch.

The theory behind the core inflation measurement is straightforward – we aren’t going to buy ridiculously expensive bananas and we will find ways to spend less than we have to on petrol, particularly if the price heads over $1.50/L. Thus the inflationary effects will actually sort themselves out to some extent in the short term.

Peter Fray

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