Finally, there’s good news about inflation!

Sascha: [00:00:02] Welcome to The Dive, the podcast that asks whoever said business news needs to be all business. It's about time we got some good news. 

Audio Clip: [00:00:12] The latest inflation data is being released right now. A key factor in the RBA's decision. Latest inflation numbers come in at 6.0% for the year to June. That's below expectations of 6.2%. Yes, inflation is certainly moving in the right direction from close to 8% in December to 7% in March to 6% now. It was a keenly anticipated figure in the end, as the markets got inflation slightly wrong, that is, it came in slightly lower than expected.

Sascha: [00:00:41] That's right. The latest figures report that quarterly inflation is lower than expected. Inflation coming down is good. That means more money in our bank accounts. But mostly we pay attention to inflation because of its effect on mortgages. It's Monday, the 31st of July. And today I want to know, does this mean we'll finally see an end to these interest rate rises? To talk about this today, I'm joined by my colleague and the co-founder of Equity Mates, it's Alec Renehan. Alec. Welcome to the dive. 

Alec: [00:01:14] Sascha. Good to be here. Good to be sharing some good economic news. Feels like the last, what, 12, 18 months hasn't been a lot of it, so let's enjoy it. 

Sascha: [00:01:23] Yeah, it's been a long time between drinks, I've got to say. So tell me about this latest data. 

Alec: [00:01:29] So, Sascha, inflation, as we've all learnt, whether we're interested in the economy or not, is the measure of the change in the price of goods over time. And for consumers all around the world, the changes in the prices of goods has only been going one way and that's up. But the good news for not just Australians but people around the world is that the rate of inflation is slowing. Prices are rising slower than they were this time last year. So let's start in Australia, but I've got some numbers for you around the world that really tell the story. In Australia, the consumer prices rose 0.8% for the three months to the end of June. Over the past 12 months they rose 6%, which is still a lot and which is more than we want. But that 6% is down from 7.8% in the 12 months to December. The 0.8% for the quarter is down from 1.4% for the previous quarter. So good news, the numbers heading in the right direction. 

Sascha: [00:02:35] And I've got to put a quick shout out the Get started Investing series at the moment. You're looking into some of the ways that you can kind of shave off a few expenses from some of the expenses that make up what they used to measure inflation. 

Alec: [00:02:47] Yeah, the CPI Consumer Price Index. Now that's Australia's number. Good story. Getting better story, maybe not quite good. Overseas, we're also seeing good stories play out, keeping in mind that most central banks target inflation at 2 to 3%, that's sort of the band that they want to hit the US for. Looking at the past 12 months to the end of June is at 3%. Alright.

Sascha: [00:03:19] Insert streamers and cheering noises. 

Alec: [00:03:21] Hopefully that's some background music that makes that a little better. But anyway, 3% an annual rate of 3%. Now compare that to June. Last year America was at 9.1%. 

Sascha: [00:03:33] Yeah, that's a remarkable improvement. 

Audio Clip: [00:03:37] The US Federal Reserve has moved to increase interest rates to a 22 year high. It's risen from 5.25% to 5.5% in an effort to quash inflation. 

Alec: [00:03:47] In that time, the US Federal Reserve has raised interest rates 11 times and it's gone from near 0% interest to, I think, a target of between 5.25 and 5.5%. So there's been some aggressive interest rate rises in the US, but inflation has come down meaningfully. Great story over in Europe. In the eurozone, inflation is down to 5.5%. In June it was 10.6% in October last year. So in less than a year, the rate of inflation has almost halved in Canada. Another good news story for the 12 months to the end of June, it's at 2.8%. Yeah, it peaked at 8.1% in June of last year. So there's some good news stories emerging around the world. The rate of inflation is slowing. Now, that's not universal. There are countries where inflation is still stubbornly high. 

Audio Clip: [00:04:47] Olive oil up 49%, milk up 40%, eggs, cheddar bread all up massively. In fact, food prices have risen to a 45 year high of 19. Percent, putting further pressure on households and leaving overall inflation stubbornly high.

Alec: [00:05:06] The UK, it is coming down to the end of June 7.3%. It was 8.7% in May. It peaked at 9.6% in October. Directionally, it's going in the right way, just a lot slower than the rest of the world. 

Sascha: [00:05:21] And the U.K. has had particular influences that I imagine have made that change a lot harder than maybe some of the other countries. 

Alec: [00:05:27] And one more country to touch on, Sascha. Our friends across the ditch, New Zealand. They are also remaining stubbornly high. Not as high as the UK. In June last year, the annual rate of inflation was 7.3%. Their current annual rate of inflation is 6%. Surprisingly, in New Zealand, it's because of the stubbornly high cost of food. The cost of vegetables has risen 23% in the past year in New Zealand. And basics like eggs, milk and cheese are up 13.8%, according to Stats New Zealand. So yeah, food prices are really making inflation stubbornly high over in New Zealand.

Sascha: [00:06:09] That's super interesting, Alec. Well, let's come back home and look at some of the individual drivers of what's brought this back down. 

Alec: [00:06:18] So let's start with the good news because we're on a good news story today. Sascha, so long may it continue. 

Sascha: [00:06:23] Want to keep that smile on my face for as long as possible. 

Alec: [00:06:26] Some of the categories for Australia's consumer Price Index that have seen the biggest falls. Domestic travel and accommodation down 7.2%. Obvious reason for that is because half of Australia is doing international travel to Europe and why. 

Sascha: [00:06:43] They're not here. They're not actually here. So that's why it's going down. 

Alec: [00:06:46] Holiday parks are empty across the country. Yeah, down 7.2%. So that's really great news. Electricity prices down 1.8%. I was surprised by that. Feel like my bill hasn't reflected that. But we'll say. 

Sascha: [00:07:01] But I guess this measured slightly warmer months than we're enjoying at the moment. So maybe not as many heating bills.

Alec: [00:07:06] I guess so, no, it's the quarter to June and it compares year on year. 

Sascha: [00:07:11] It can be cold in June. That's.

Alec: [00:07:14] So we can't blame seasonality for that. Clothing and accessories down 2.2% and automotive fuel down 0.7%. So they were some of the drivers of the lower rate of inflation. Now, Sascha, I know I said we're only talking about good news today, but there are some price categories still rising, unsurprisingly, for people that don't own houses. Rising rents has been a big driver, up 2.5%. International holiday travel and accommodation up 6.2%, Qantas jacking prices because everyone's going to Europe. Other financial services up 2.5%. New dwellings purchased by owner occupiers up 1% and food up 1.6%. 

Sascha: [00:08:02] I think the really interesting one there is the rent point I like. I mean, we've done several stories on that this year, but it feels like a bigger conversation. That's it's just not going away, is it? 

Alec: [00:08:13] The Australian Bureau of Statistics came out and said that rents recorded the strongest quarterly rise in prices since 1988. So what? What's that? 23 plus 12, 35 years. And that reflects lower vacancy rates amid a tight rental market. We've spoken about some of the challenges in the housing market. We had Matt Barry on the Equity Mates podcast. Christopher Joye earlier this year as well. Thomas the Economist from Comedy versus Economist We've covered this story a lot, but this is the result of that story. 

Sascha: [00:08:49] All right, Like inflation is coming down. Good news. I hope there's a cake in the office today in celebration, but we do want to see it deflate, I guess, even a little bit further. And I think the natural question, of course, is what does this mean for interest rates? The day after we release this, the RBA will be meeting to decide again what they're going to do. First Tuesday of every month, just in case you don't have that marked in your diary. But let's get into that in just a minute. 

Audio Clip: [00:09:22] It's really pleasing to see that inflation in our economy is moderating further. 

Sascha: [00:09:26] Welcome back to the Dive. We're celebrating a good economic story today. There's a smile on my face. Inflation numbers have come down. There's more work to go, but it is good news, Alex. Let's dive into what this means for interest rates. 

Alec: [00:09:41] That is the big question. And around the world, we are seeing a lot of, I guess, debate about where central banks are going to go because the number one policy tool that governments and central banks have to fight inflation is interest rates. And we've seen rising interest rates. We felt rising interest rates this year in America. I think the number is 11 interest rate rises out of the past 12 months and they've gone from zero to about five and a half percent in terms of the interest rates. In Australia, the Reserve Bank of Australia has increased 12 of the past 14 months and we've gone from a cash rate of 0.1% in April 2020 2 to 4.1% at the moment. 

Audio Clip: [00:10:33] Inflation in the June quarter is much lower than the consensus forecast and really shows that the work of the Reserve Bank over the last 12 months perhaps went too far in hiking interest rates.

Alec: [00:10:46] So, Sascha, the question is what happens next? 

Sascha: [00:10:51] Exactly that's what I'm asking you.

Alec: [00:10:54] Well, I'm going to keep deferring, answering it myself and giving us more information. Oh, great. Financial markets have had the odds of a rate rise in August at just over 50%. So that was saying it was almost a coin flip, but it was maybe a little bit more likely than unlikely when the most recent inflation data came out. So that inflation data for the June quarter that we spoke about before the break, they repriced the odds of an interest rate rise and it's now at around 30% chance of an interest rate rise. So financial markets normally have their finger on the pulse here. They think it's more unlikely than likely that the RBA increases. But Sascha, economists will argue every side of an issue. If you ever ask an economist the odds of something they'll tell you 6040 because it's like, you know, it's not quite 5050, but it's, you know, it's, it's. 

Sascha: [00:11:52] Like it makes it interesting, keeps it spicy. 

Alec: [00:11:54] And we've been reading some commentary from economists around what they think the RBA will do. And once again it's you can get every opinion. So Stephen Smith from Deloitte Access Economics wrote. The inflation data released today is further evidence that the Reserve Bank has increased interest rates too far, so he doesn't think the RBA should raise again. Marcel Phillip from Capital Economics took the other side of the issue. He believes the RBA should implement at least one more rate rise. He wrote in a note to clients, quote, The bank may well conclude that the battle against inflation has been won. However, we think that this would be a risky move, so he is calling for at least one more rate rise, I guess, just to cement the decelerating inflation.

Sascha: [00:12:45] Yeah, put the nail right in all our coffins. I'm sorry. 

Alec: [00:12:49] Well, that's more of it. ANZ senior economist Adelaide Timbral didn't make a call on what the RBA would do next, but just made the point that the sharp drops in the headline, the core CPI and non-tradable and services inflation. So all the different measures of inflation, the fact that they all dropped is a reflection of the fact that the increase in cash rates have worked. So I think, you know, we don't want to celebrate the fact that people are in mortgage stress and that the cash rate has gone up so much and people are finding it hard. But I think we should be pleased that inflation is coming down as a result of it, because it would be even worse if we were sitting behind these mike saying the cash rate has gone up aggressively and inflation is still high. So in the sense that even though it's a pretty brutal policy, the policy has worked. It's better than a brutal policy not working. 

Sascha: [00:13:49] Yeah, absolutely. When so many people are feeling pain and pressure financially, it's nice to at least feel like some needle is moving as a result of that. Look, Alec, you've managed to wriggle out of answering. Every time I'm asked directly, I want a prediction from you. What do you think the RBA is going to decide tomorrow? 

Alec: [00:14:15] Sascha, I'll make a prediction, but I'm going to ask you to make a prediction as well. 

Sascha: [00:14:18] Oh, no.

Alec: [00:14:20] So. It's an interesting one. I, I wouldn't want to go against financial markets if they are pricing it at a 30% chance that a rate rise happens, you'd probably have to say that it won't happen. There's probably two reasons that you could expect a rate rise to happen, like interest rates are as much psychological as they are economic. And the RBA may say we're seeing inflation come down. We want to really end it and destroy some demand and get there. And so maybe one more interest rate rise, we'll get that. Over the line. The other thing to keep in mind is that Phil Lowe is almost at the end of his term. So his term as governor of the Reserve Bank will conclude on the 17th of September this year. 

Audio Clip: [00:15:08] Probably in some ways, the worst kept secret. I don't think many were expecting Philip Lowe to be extended after seven years as Reserve Bank governor with his position that term coming up in September. 

Alec: [00:15:20] There is an argument that Phil Lowe might do a favour for his successor and raise one maybe two more times so his successor doesn't have to come in and do some raises in the first couple of months. I'm not sure if they're going to play that political game, but that would be a nice thing to do to set your successor up for, I guess, an easier time than Phil those had this year. 

Sascha: [00:15:47] Alec, you took the words right out of my mouth. That was actually I think financial markets usually have their finger on the pulse, so to speak. Obviously, they are usually a culmination of what everyone's thinking. But this year I've read more headlines at the RBA in it than I ever remember doing. And it really seems to be centred around Phil Lowe and the job that he's done and I wouldn't be surprised if there's just one more for good measure. And also just before his contract ends.

Alec: [00:16:14] Well, Sascha, by the time people are listening to this, they may already know if you don't already know. Head across to the equity mates Instagram. We normally get a post up when the results come out. So equity mates over there? 

Sascha: [00:16:27] And if you're listening in that little window before it happens, why don't you send us a line and tell us what you think? All our contact details in the show notes below. Thank you so much for joining us today on The Dive. And thanks, Alec, for coming and sharing some good news. For once, it's kind of nice. 

Alec: [00:16:42] Thanks, Sascha. May it long continue. 

Sascha: [00:16:44] Yeah, exactly. Until next time.