There will now definitely be a rate rise in November. The only question now is whether there will be another one in December as well, and whether the Reserve Bank will even bother waiting for the December quarter CPI in February to move a second time. As for November 7, the day after its next board meeting, if the RBA did not raise interest rates, it would be rightly seen as a blatantly political act.
So complete is the consensus in the market that there is no longer anyone on the other side of the bet and money market traders are reduced to betting on Maxine McKew futures – $2.50 for the win in Bennelong, “a snip” said one trader: “everybody’s getting on Maxine”.
Forget about the relatively benign-looking headline weighted average of 0.7% for the quarter, and 1.9%. That’s not what the Reserve Bank, or anyone else, looks at any more because it is distorted by one-off irrelevancies. The weighted median is 1% (3.1%pa) and the trimmed mean, which is what the RBA actually pays attention to, is 0.9% (2.9% pa).
Those RBA measures of inflation are now at the top of its band of comfort of 2-3% and have not stopped going up. With rising prices of oil, food and rents Australian inflation is about to burst through 3% and is expected soon to be 3.5%. Moreover the inflation rate is being boosted by the statistical aberration of a low inflation shock a year ago which is now working its way through the CPI growth rate.
By the way, both the median and the trimmed mean are obtained by the statisticians listing all the components of the CPI from highest to lowest and then simply chopping off the ends of the list. For the median they cut 50% off each end of the list so they are left with the figure that’s bang in the middle; for the trimmed mean they chop off the highest 25% and the lowest 25% so they are left with the half in the middle. It’s a way of smoothing out the figure and eliminating the “noise” of big once-off price movements.
And this means that no one, including John Howard and Peter Costello, can say that inflation isn’t really a problem and that it’s only a short term blip. It’s not – inflation in Australia really is on the move and it is the Reserve Bank’s job to do something about it.
Moreover with non-farm GDP at 5.2% year on year for the June quarter and unemployment at a 33 year low of 4.2%, there is no risk in raising rates in November. The risk is all John Howard’s, and today’s CPI is undoubtedly the greatest blow he has yet suffered in his campaign to be re-elected: brace yourself for an election campaign rate hike, Prime Minister, and practice trying to explain it away.
Alan Kohler is publisher of Eureka Report. This is an edited version of a column to be released later this evening at www.eurekareport.com.au.