Latest CPI data isn’t as promising as you might think

[resjudicata]

@pedrito Generally speaking, averaging percentages leads to invalid conclusions: https://www.robertoreif.com/blog/2018/1/7/why-you-should-be-careful-when-averaging-percentages

Averaging a percentage change introduces further complexity. It might be valid but I wouldn't assume so without careful checking.

 

[pedrito]

@resjudicata I agree, in the context of the example they provided in that link.

The CPI data, where the underlying data from where the percentages have been calculated doesn’t significantly change between years, I’d argue it’s acceptable. After all, that’s the point of the CPI data.

The percentage being averaged here is simply the index from a quarter in one year, divided by the corresponding quarter in the previous year.

 

[johnsanai]

@pedrito Isn’t the point that it’s a sign that things are trending in that direction? People don’t just stop spending flat, so CPI always trends right?

 

[dmit5487ivan]

@pedrito If past quarters were below averages, we'd be below average overall. We have elevated inflation. It's continuing to fall.

And continued falls don't require further monetary or fiscal tightening. It's not like you tighten, and everything immediately falls. Rates are really, really restrictive. That's already killed the consumer. Business held up last year, but is likely to slow more. Demand is falling. A lot of the disinflation so far has been supply chain healing. There's still plenty of disinflaiton from below trend growth to come.

And we most certainly don't need to get within the target, let alone towards the mid-point or something, before rate cuts. They'll come when return to target is credible. If other data is positive, the central bank might wait a bit, but if it turns more negative, there'll be cuts.

 

[pedrito]

@dmit5487ivan This is a valid point that I haven’t considered.

Another aspect to be considered is the saving buffers that had been built up by consumers over the Covid years. It’s likely that these buffers carried people through the rate hikes and allowed people to continue their previous spending habits for some time.

If these buffers have been somewhat exhausted, then you would think the quarterly changes will continue to decrease as demand continues to slow.

 

[dmit5487ivan]

@pedrito I'm sceptical about the buffers thing. Distribution, maybe, but buffers seem to me to be going up, not down. CBA etc don't think so, you'd think they'd have a better idea, but they don't show their working... so I'll just not believe them. Maybe they mean in terms of "months of earnings" or something.

There's not a huge amount of additional household demand slowing the RBA can tolerate. We've had a number of slow quarters. I guess we can dip to GFC or 90s recession levels, but that's going to feel dire. And business demand will be slowing, so it's going to be hard to avoid negative quarters of growth.

If all the while inflation is falling, and other central banks are starting to cut rates, it's going to be a pretty straightforward decision. Of course, if we have a Middle East blowup with major flow on effects or something, it's going to be a more complex thing to work out.

 

[pedrito]

@dmit5487ivan Anecdotally, I know people who built up reasonably large balances in their offsets over Covid, but have since exhausted this balance with the increased rates. They didn’t really modify their spending until mid last year, when I noticed them selling their discretionary toys or catching public transport to work etc.

I do think it’s a bit of a tightrope for the RBA. To squash inflation as well as avoid a recession.

In fairness to them, I think they’ve made good decisions to date. I’d like to be optimistic and think that inflation will return to the target band this year, but I just don’t see it, given my (albeit potentially flawed) rudimentary assessment in the OP.