The RBA has squibbed again this month. With long-run credibility on the line, it needs to focus on getting inflation inside the target band.
The Reserve Bank seems to think, to use the phrase of the moment, that it just fell out of a coconut tree. It’s acting like its hopes of a “narrow path” to a soft landing do not exist in a context. But they do. And that context is a long-run, abject failure to deliver on its inflation target.close to zero.
The reason that delivering on the inflation target is so important is that anchoring inflation expectations is the secret sauce of central banks. Their. The finest achievement of macroeconomics in the past half century is the establishment of inflation-targeting regimes that have ensured price stability. First as a matter of economic theory, then as a matter of practice by central banks.
Much has been made of last week’s quarterly inflation data. Headline inflation was 3.8 per cent for the year, with underlying inflation at 3.9 per cent. This wasWhat got less attention is what the actual numbers were, once the government’s energy subsidy fudges are backed out. Barrenjoey economist Andrew Lilley calculated that the real numbers were headline CPI of 4.3 per cent and trimmed mean of 4.0 per cent. That’s miles away from where they need to be.
That, alas, brings me to the specious argument made increasingly loudly by certain commentators with a tenuous grasp of economics. It goes like this. The big price increases are for things such as insurance and energy, and allegedly these are beyond the influence of the RBA. This is followed up with: “If you don’t have a mortgage, interest rates don’t affect you.”Oh dear. First, the premise is wrong. Homegrown inflation is entrenched broadly in the non-tradeable sector.
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