For five years the Reserve Bank has been trying to wrangle inflation back to its 2.5% target, and for years it has essentially failed. The result is a cost of living crisis that has generated intense community grievance. The RBA’s deputy governor, Andrew Hauser, acknowledged as much on the ABC’s 7:30 report on Tuesday.
Not yet, said Hauser, even as he hinted we are getting closer every day. The RBA’s nine-member board had hoped this year’s three interest rate hikes would be enough to bend the arc of inflation slowly back to reach 2.5% by the end of next year. The latest blow is the complete breakdown of the US-Iran ceasefire, with escalating tit-for-tat strikes on oil tankers and infrastructure in and around the strait of Hormuz.
The global oil benchmark has risen above $US100 a barrel for the first time since July. Fuel prices are tracking higher once again, with unleaded approaching $2.10 a litre and diesel passing $2.50. Then there is this year’s sudden explosion in datacentre investment.
That has heaped pressure on a construction sector already struggling to get the materials and labour it needs to build the massive pipeline of work to build homes, roads and rails. Households are complaining a lot and feeling depressed, but there’s still a surprising lot of spending happening, which is keeping consumption growth ticking along. Meanwhile, Australia’s productivity performance – the thing that could make it easier for the economy to grow without pushing inflation up – remains flat.
Investors and an increasing number of economists believe we are approaching that point when the RBA has to say “enough is enough” and act more aggressively to get price rises back under control. Financial markets are pricing in more than a 70% chance of another rate hike on 29 September, and even the chance of a second by the end of the year. We could no longer take seriously the full employment part of our objective [and say] we’re gonna bring inflation down come hell or high water.” Here Hauser is pointing out that the RBA has not been asleep at the wheel, but has been making a conscious calculation.
Since mid-2021, annual inflation has only been below 3% for one year. On the other hand, unemployment has been below 5% for almost all of that time – a labour market record unmatched in modern Australia history. The question now, frankly, for us is have we done enough, or is more needed.”
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