Monthly Inflation Signals More Downside to CPI

 

The TD-MI Monthly Inflation Gauge confirms that inflation is locked in at a low level and this will be a further valuable input into the decision on how much to cut interest rates when the RBA Board meets tomorrow.

With recent developments in markets, the global economy and in the domestic data, a 50 cut now looks a good call.  It actually looks a necessary policy change to make sure the economy does not fall further below trend.

The Inflation Gauge was unchanged in May after rising 0.3% in April for an annual rise of just 1.8% – inflation remains around or even a touch below the bottom of the RBA 2 to 3% target band.  The news in the monthly Inflation Gauge suggests an official CPI result of around 0.7% for the June quarter or around 0.6% for the underlying measure which, if realised, would see the annual increases at 1.4% for the headline CPI and 1.9% for the underlying inflation rate when those numbers are released in late July.

With inflation dead, buried and cremated, the concern for the economy now has several layers:

• The world economy and global markets are ugly.  Growth is decelerating, commodity prices are diving and policy makers are hamstrung.  Not a great climate.  Many people pulling the policy levers globally don’t know what to do – or worse, can’t act due to political constraints.

• In Australia, consumers are being hit with falling stock prices, falling house prices and only a few weeks ago saw interest rates move to a level vaguely accommodative.  Until then, the RBA had stubbornly kept interest rates too high.

But that is water under the bridge.  The RBA can get on the front foot and it should very directly cut interest rates by 50 basis points tomorrow to signal that it is doing what it can to make sure it doesn’t miss its inflation target on the down side.