And just like that the Reserve Bank ran out of excuses. After the release of the December quarter inflation figures, the RBA not only should cut interest rates, but it almost certainly will. Failure to do so would be one of the most political and misguided decisions the RBA would have made in recent history.
The December quarter inflation figures released on Wednesday showed prices in 2024 rose just 2.4% – well within the RBA’s target range and the trimmed mean measure of core inflation slowed appreciably from 3.5% to 3.2%.
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This was the last major set of data everyone has been waiting for in order to gauge what the Reserve Bank board will do when it finally (after two months off) meets on 17 and 18 February. Now all the boxes have been ticked.
And sure, the December quarter figures were more of a confirmation of what most already knew, but had there been a surprise jump in inflation, the pressure on the RBA to cut rates would have lifted.
Now they have no excuse.
Not only are the annual inflation figures showing prices are rising at the pace the RBA aims for – within 2% and 3% – but the December quarter itself had prices growing slower than that associated with 2% annual inflation.
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To not cut rates now would mean everything the RBA has said it cares about with regards inflation is total mush – just some convenient sounding lines to pacify the plebs.
The only reasons you could argue the RBA should not cut rates is because you remain annoyed that your claims that government spending was fuelling inflation have been shown to be laughably wrong, or that you just want more people to be unemployed because your twisted ideology demands 4.5% of people always be looking for work.
Once again, these figures highlight that governments can actually reduce inflation. The government’s energy subsidies have been a crucial reason why overall inflation is down:
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Never again should we swallow the lie that only the Reserve Bank can tackle inflation. We also should never again listen to those economists who seem to desire other people (it is never themselves) to be unemployed in order to apparently cause inflation to fall.
A year ago, unemployment was 4.0% and inflation was 4.1%. Now unemployment is 4.0% and inflation is 2.4%. All those crying about the need to adhere to the “non-accelerating inflation rate of unemployment” and either raise interest rates (yes, some were arguing that last year) or keep them steady, will once again have to update their formulas and declare that the “Nairu” has fallen. Huzzah!
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Those wanting to claim that it’s just the electricity subsidies that have caused inflation to fall, and the CPI is not real inflation but just “measured inflation”, need to explain why the prices of 61% of items in the CPI basket of goods and services are rising slower than 3% a year, and why the RBA should keep rates steady even though the share of goods and services that have prices going up by more than 5% a year has fallen from 40% a year ago to just 20%:
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One thing that has not changed is that rental prices remain the biggest driver of inflation, and that restaurant meals are really the only items among the top dozen which would be directly slowed by higher interest rates:
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Rental price growth across the nation has not been consistent – Perth renters have really taken it in the neck, while those in Canberra and Hobart have been relatively less hurt:
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Other major services are showing price growth getting back to normal. The main exception is insurance costs. This is not surprising given the impact of the climate crisis on insurance costs. The recent fires both here and in the United States will probably mean insurance premiums continue to rise ahead of other items:
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In the run up to the election, commentators often like to argue that the RBA wants to avoid looking political. Usually this relates to it choosing not to either cut or raise rates and thus choosing to keep rates steady to look “neutral”. But in this current instance, not cutting rates in three weeks would be highly political.
And given the inflation figures, it would also be wrong. The time has come to cut rates.
Greg Jericho is a Guardian columnist and chief economist at the Australia Institute and the Centre for Future Work
