The RBA’s decision to lift interest rates by 50 bps to 0.85 per cent highlights the need to report inflation monthly rather than quarterly.
The RBA has relied on CPI figures for the March quarter.
They are the same figures it relied on to raise interest rates by a quarter of a per cent in May; and will be the same figures it relies on at its July meeting. This is because Australia only reports CPI data quarterly, therefore, we only have a limited understanding of the impact May’s interest rate rise had on inflation.
Australia’s reliance on quarterly CPI figures meant it was out of sync with other major economies, The US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England all having access to data within weeks of making a rate decision.
If however, the RBA had access to monthly CPI figures, like most advanced economies, it would be in a much better position to form a view and respond effectively.
This would also give governments, businesses, and other organisations more timely and accurate information to influence financial decisions.
Relying on quarterly CPI data when the rest of the world gets it monthly, is like waiting at your letterbox for updates when your neighbour gets them on their phone.
Cost pressures can be temporary (supply & demand caused by supply chain constraints) they are nonetheless forcing businesses to increase prices.
As these price increases put pressure on wage demands it can quickly lead to a sustained inflationary cycle something that the Australian economy has not experienced for many years.
As government’s and households are heavily indebted, any interest rate rises will eat into budgets and discretionary spending. The RBA will be looking for signs to ensure the inflationary pressures do not get out of control as it contemplates the pace of future rate decisions.
