‘Normal’ service from now on for the world’s most important central bank – the inflation-busting days of 2022 are behind the US Federal Reserve and now it’s more like a herding operation to get investors to understand that it will take a while to wring cost pressures out of the economy, especially in America’s huge services sector.
And in doing so, it will do what all central banks do when confronted with high inflation – continue to force consumers to wear the pain of what economist jargon calls tight monetary policy – ie high interest rates and falling real income, especially wages.
The Fed lifted its key rate by 0.25% (as did the Bank of Canada last week which also said that will be it for a while) to a range of 4.5%-4.75% – the highest since 2007. The Reserve Bank here meets Tuesday and will lift rates by 0.25% but won’t be as decisive as its Canadian counterpart in signalling a pause.
The RBA will follow the Fed whose chair, Jay Powell, made it clear in post decision comments to a media conference on Wednesday that while inflation is definitely easing, it remains too high, especially in services.
“It would be premature,” he told the media conference. “It would be very premature to declare victory, or to think that we’ve really got this.”
The disinflation process, he said, is in its early stages, but the “job is not fully done.” Core services excluding housing have yet to experience disinflation, he added.
He said the Fed expects housing costs to continue rising (as they are doing here in Australia).
“We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” Powell said.
“Why do we think that’s probably necessary? We think because inflation is still running very hot,” he said, making sure that markets still understood the central bank’s position on cost pressures.
For some reason investors took that as a greenlight from the fed to continue the January rebound – sounds like the Fed needs to slip in a 0.50% rise to help bring the herd back under control.
The Fed’s move and its reasoning will be closely followed by the Reserve Bank of Australia next Tuesday because, like the US, Australia’s inflation looks like it has been deeply embedded in services, especially property, housing, energy and other areas where competition is weak and regulation lax.
The Fed statement did not mention any fears about a prices/wages spiral or a wages/prices spiral, as we heard from the Reserve Bank and Governor Philip Lowe in late 2022.
Wednesday saw two senior RBA officials go out of their way to avoid mentioning wage dangers in an appearance before the Senator. Cost of Living Inquiry.
Comments from Marion Kohler, the RBA’s head of economic analysis and Tom Rosewall, her deputy were a very different take on what is happening to incomes than we have heard in the past year from policy officials.
The statement contained the first admission from the RBA that it thinks inflation in Australia has peaked at the 7.8% quarterly reading in the Consumer price Index (and the very high core reading of 6.9%) – even though the monthly indicator for December showed a rise of 8.4%.
The tone of their comments was almost apologetic, conciliatory even, mentioning even how household incomes had fallen behind in the past year as inflation rose faster than incomes – a rare admission that households and wage earners have had a tough time battling falling real incomes. That is something that has been missing from RBA statements and commentaries, especially about the need to control inflation and restrict demand (ie, consumer spending).
“It is clear that the cost of living in Australia has increased significantly. But that is not the full picture. What matters also is whether people’s means to pay these costs – their incomes – have kept pace. Over the past year or so, consumer prices have grown faster than households’ disposable incomes, meaning that real incomes have declined overall,” the duo continued.
“The experience of individual households varies widely. Hourly wages have picked up, but not by as much as inflation, and so some workers who have remained in the same job and with the same hours will have seen their real incomes decline significantly.”
This is the reality of the Australian economy at the moment – despite the strong jobs market, high inflation and reasonable economic growth, there is no traction for any sort of wages explosion, despite business, many economists and the business media spending months looking for one in every Wage Price Index report, National Accounts, RBA statement or commentary.
The RBA and others talk about ‘reducing demand’ (because they know they can’t correct what has been a supply-driven inflation crisis) which is economicspeak for cutting income – real or otherwise
Business economists, commentators and the AFR had the hide to express surprise at the 3.9% slump in retail sales in December. After the big sales campaign in November boosted retail sales by 1.4%, they slumped the next month because consumers are idiots and won’t be conned into making two lots of big purchases in a month or two, especially when their incomes are sliding.
Real incomes and real wages have fallen sharply behind inflation – it’s what all those gung-ho economists, business commentators at the Financial Review and in investment banks and academia know is happening as they support income suppression as the primary tool for fighting inflation.
