Too little, too late

Although the increase in the June quarter headline CPI was much larger than estimates of the underlying rate, reflecting fuel price increases and a sharp rise in the price of bananas in the wake of Cyclone Larry, it is important to abstract from temporary influences in assessing the medium-term outlook.

Overall, the Bank's assessment following receipt of the June quarter prices data was that underlying inflation would remain somewhat higher than had previously been forecast. This assessment was based on the gradual increase in underlying inflation this year, and the wider background of above-average global growth and strong domestic demand.

Taking into account the expected effect of the August policy decision, the Bank's current forecast is that underlying inflation over the next two years will be around 3 per cent. In the short term, headline CPI inflation can be expected to remain significantly higher than that, but will decline to the underlying rate when temporary factors drop out of the calculation.

In summary, the situation reviewed by the Board at its recent monthly meetings was one in which evidence of stronger domestic conditions and inflation pressures was accumulating. The global economy was maintaining its strong pace of growth, while inflation in a number of countries was rising.

In Australia, national accounts data indicated a pick-up in the pace of growth in demand and output in the early part of the year, while more recent data pointed to further strength, with business surveys reporting good conditions in the June quarter and employment posting large gains. In addition it was apparent that the household sector's demand for finance had been increasing through the first half of the year. Data on producer and consumer prices for the June quarter indicated that these domestic and international developments had been accompanied by stronger inflationary pressures.

A leading economist told Henry “they have obfuscated - failed to own up to their mistakes” and avoided saying they have a “bias for tightening”. So, despite Stevens’ proclaimed Christian values and conscientious nature, it seems there is still room for improvement in the Bank’s public utterances.

But the bigger challenge for Governor Stevens will be to confront and subdue Australia’s current inflationary pressures without unduly hurting economic growth and jobs. It is sadly the poorer members of Australian society who will suffer most, and this will worry Glenn Stevens quite a bit, as it should.