Inflation - RBA response?

Though there is a general assumption that current inflationary spike is transitory and will come back to its all time low, It will come down alright,
but will inflation be back to its last decade avg of 1.5-2.5% band? aka MR of 3.5-4.5%
or is inflation going to form a new normal base 3-5%? aka MR of 5-7%

What's the rational for Inflation's higher new base of 3-5%?
I think we are at the start of deglobalization decade and new Inflation band can be seen as its bare minimum cost.




Last decade Inflation was not an issue as it happily resided in its 1.5-2.5% band ( attribute it to peak globalization discount?) so CBs carried their rates cuts heck even QE without any real challenge, till recently when inflation genie called CBs bluff and spiked across the globe.
It will get increasingly difficult for CBs, across the globe to justify QE with inflation hanging at their neck.


US is not in that bad a spot if you look at it,
Its banks are stronger with marginal mortgage risk
Its household debt is not total out of whack, albeit its far less then GFC peak
Its recent spike in MR Which literally doubled in less than 6 months is not much of an issue to existing borrowers due to 30 yr fixed rates.
Its corporate balance sheet is quite strong and loaded with low yield long term debts, which they smartly raised during last couple of years at ATL yields.
So FED may not be so strangled in tackling Inflation I think they may even go overboard as Niel kashkari keeps suggesting.

 

I think IR hike effect resulting in mortgage repayment stress will be limited to overleverage buyers/investors and won't be broad based,
that doesn't mean prices won't fall, we should not under estimate profit-booking effect from very many who are sitting on very nice profits.
Selling due to stress may be be marginal in comparison to above lot.
and since IR hike stress may be less broad-based, this will reduce the pressure on RBA and they may continue to target its normal band of 2.5% albeit slowly if inflation tames down i.e.

 

Rate rises & high leverage alone aren't the only factors that may conspire to push higher defaults. Continuing Inflation, wage stagnation & a possible rise in unemployment will be the sucker punch ...

 

@TheSackedWiggle , I think agree mostly with what you are saying. RBA lifting rates to 1.5-.2.5% is happening but i think the timeline is where we differ in opinion. They have always been very measured and very slow to move on rates and definitely agree with you that they manufactured the latest housing boom with their TFF and they should have started lifting rates earlier.

Our inflation might not be short term, because I don't think what is happening globally (Russia, China) is transitory and don't see it as deglobalisation. The whole world order is changing.

To my mind, this is just a restructure of supply chains from China(microchips, electronics..)/Russia(Petrol, gas, wheat...) to other countries and if we are lucky enough, our new government will use the opportunities that will come out of this.

Change of government has changed my mind a little bit too.
I believe that if the new government works well with the RBA/APRA and they manage to manufacture wage inflation, then yes, I believe that the RBA would be able to hike a lot more aggressively and go back to a more normalized range of 3-4% and house holds would be able to absorb that.

The government can do a lot to control inflation here, think gas for example.
One of the biggest rorts in Australia is Gas prices that is controlled by gas cartel. The fact that Eastern states pay more for Australian gas than China/Japan is just crazy. This affects manufacturing, transport, power lowering prices/inflation. The government can slash inflation today if they want to by triggering the Australian Domestic Gas Security Mechanism ADGSM...

Doubt that will be the case because both Liberals/Labor are on the payroll .i.e: Political donations

 

Hopefully we will peak soon too
Equities rise, yields fall after data shows U.S. inflation may have peaked By Reuters

 

News Corp is running a story today:

Insane Reason China is getting Aussie gas cheaper than Australians - May 29th, 2022 - 9:49am

 

The peak rate is still 3% for Fed I believe, there is a bit more confidence maybe this is the actual peak.

Australia market is still betting 3.5%… possible but I lean more to 2.5%. Even at 2.5% there will be some pain. Can’t see how property won’t come down by 15-20% at 2.5% in next 2 years

 

Do you think so? The energy shock has really only hit in the past couple of weeks, and will flow into household bills from the 1st July.

Almost all business use energy, so almost every business will have to pass those prices through. This includes everyone from retail, who uses electricity to power their lights, to meat producers who use lots of gas to run boilers to sterilising.

Meat, tomato sauce prices set to soar again - Herald Sun, 28th May

And I understand rents are still soaring which has one of the biggest weightings in the CPI as expected, it makes up a lot of the household budget.

 

Very interesting angle they took on this and they seem to have forgot that the Liberals let this slip for over 9 years while in government...

David Llewellyn-Smith from the nutters at macrobusiness, lost his credibility since he's been penning articles for news.com.au. How is this Labor's own doing as he says in his article is beyond me. They have been in power for a week now...

Nevertheless, that is actually good to see in the media and maybe it will put pressure on Labor to act on this front.

 

Correct. I don't think the article is perfect, but it's good to see it in the MSM.

On this topic of inflation he writes:

What?

Below is a graph of road freight in Shanghai up to 23rd May (Still waiting for data from last week): Still 80 percent down on 'normal' traffic compared to before the lockdown. The Port of Shanghai is the world's largest shipping port and I understand a lot of scheduled sailings from the Port of Shanghai have been cancelled. Some factories might be operating in COVID isolation, but the trucks are not getting the goods to the Port.

If we don't get some of this sorted, I would expect some of our big-box stores (K-Mart, Target, maybe even Bunnings) to be pretty empty in coming months and you know what that will do to inflation! (Sea freight is about 4-6 weeks, so I suspect retailers are now experiencing reduced shipments arriving into Australia, and are starting to run down inventories)

What's ironic, is it will hit just as the government's $420 Cost-Of-Living Tax Offset/LMITO (which will be inflationary in itself) is issued out (Tax Time). We all know what happens when there is all this money floating around, looking for goods that's in short supply!

 

expensive fuel will have more impact than energy hike. Everything common folk need, touches fuel.

 

Expecting the RBA to increase rates again next month, which follows a global trend of central banks raising rates to combat inflation.

Take South Korea for example.

South Korea steps up inflation fight with surprise rate hike

The Bank of Korea raised rates in April from 1.25% to 1.5%, which took rates up to the highest level since August 2019. In recent days the Bank of Korea hiked rates by another 25 basis points up to 1.75%. Australia's cash rate is still only 0.35%.

 

The thing about AU$ is that as commodity prices go up, our trade deficit should decrease. So this should strengthen the AU$ without actually raising rates. I think that's why the RBA may be a bit slower to act.
Secondly, the US has too much private and mountains of government debt. So inflation is going to be name of the game for the next few years. They can't afford to raise rates by much without causing a recession & the US government going broke (which the only way out would be to start up the printing presses again!).

 

Definitely interesting times ahead. There is a new level of global currency competition now, given the US basically declared that they have unilateral power to destroy US dollar savings of a counter party, as demonstrated with Russia.

Let's see how this plays out... the question I like to have answered is does anyone believe US Fed has any other option but to tighten hard.

If inflation gets out of control domestically, its a bigger problem then bring interest rate up and squashing asset prices to pre-2019 level.

 

US Central bank (fomc) will deliver a surprise 75bp hike this wed (thursday mng asia). Last night WSJ fed mouthpiece who earlier reaffirmed a call for 50bp post Fridays CPI data changed his tone.

Fed Likely to Consider 0.75-Percentage-Point Rate Rise This Week

Powell and his friends are in a media "blackout" period thus they tapped on this shoulder to pre announce this. market expectation for 75bp surged from pretty much none to near 80pct chance for such moves

this means RBA can keep "front loading" multiple 50bp to catch up. You ve heard it here first since last Nov and Dec...

 

Many alternate can sing and dance around,
For now there is no alternate to USD.

Inflation genie once out... is not easily tamed back in,
time and again, century after centuries.... have proven it
So CBs can pretend to act cool and all, reality would be very different.

If RBA doesn't get it act together really fast now and come out with its guns blazing,
We are in for a rude shock,
be ready to welcome AUD=>40cUSD and lower

RBA really has to make a choice here,
will it let few marginal overleveraged borrowers to hold rest of the country hostage?

 

Inflation is sticky. Once it's up there, it stays there.

Prices don't go back down to where they were before.

Very unlikely to see a repeat of the Coles "down! down!" price war with Woolies when margins are so tight.

 

Philip Lowe will be on 7.30 Report tonight interviewed by Leigh Sales

Worth a watch

 

"We will keep rates at where they were till 2024.... it was conditional statement not a promise"
"Inflation target of 2.5%" want's to get back to this from current 7%
"We will do what's needs to be done to get inflation under control"
"We don't target housing prices" X 2 times
"Full capacity, Resilient economy" X 3+ times

Q: Did you overstimulate the economy?
A: "RBA took out insurance.. may be too much...."

 

In short
First.... Inflation inflation inflation
then... full capacity, full capacity, full capacity
then.... we did it, we did it, we did it
Increased Repayment?.... Resilient economy, Resilient economy, Resilient economy
Falling House prices? ... "We don't target housing prices", "We don't target housing prices", "We don't target housing prices"