The headlines all warn that core inflation “remains high” and that the futures market is predicting a 78% chance that the RBA will increase rates next week.
We need to keep things in perspective.
First, after three annual increases in interest rates and with the gradual easing off in fiscal policy, inflation poses no immediate concern. Underlying inflation is slightly below the Reserve Banks management bracket. The trimmed means percentage change of 1.4% in the December half-year can be represented as 2.8% on an annual basis. The figures are likely to go down further in subsequent quarters.
House prices, while excessive, are bound to slow down with the end of the stimulus package. Other asset prices are subdued.
And the Reserve Bank does not simply look at the unemployment rate: it looks equally at the overall under-utilisation rate (totals hours worked). In fact, hours worked per member of the labour force have declined by 4% relative to what it was when the recession hit in mid-2008. There is ample spare capacity.
Finally, there is no sign yet that real Gross Domestic Product is accelerating to more than 3% per annum, which is the threshold spending target used by the Rudd Government. The latest IMFs growth forecast for the Australian economy is under 1 per cent in 2009 and 2.5% growth in 2010 (compared with earlier over-optimistic forecasts by the RBA of 1.75% and 3.25%).
The RBA would be wise to keep interest rates on hold for the time being.