Life moves pretty fast – as do interest rate increases

Locally, the next consumer price index is due out on July 27. There is every chance Australia’s headline inflation rate could jump from 5.1 per cent to something north of 7 per cent.

The response overseas to these gathering inflation pressures has been unequivocal. The central banks of New Zealand (2.5 per cent) and South Korea (2.25 per cent) both lifted their key indicator interest rates by half a percentage point this week with no sign they will stop there.

They were outdone by a grizzly central bank of Canada, which ratcheted up rates by a full percentage point to 2.5 per cent.

The RBA, at 1.35 per cent, looks a long way behind the inflation-control curve, especially with such an incredibly strong domestic jobs market and inflation accelerating.

There is a good argument that inflation will start to ease sharply next year. Some of that will be mechanical as the high March and July CPI reports drop out of the annual figure.

Interest rate movements can take up to 24 months to fully work their way through the economy as businesses and consumers adjust to the changed cost of money.

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That means getting to a place of “normality” as quickly as possible is imperative for any central bank. A cash rate of 1.35 per cent is clearly still a long way from normal.

The RBA’s biggest concern, outside of spiralling inflation, is that households (and businesses) believe inflation has become entrenched.

News sites have been filled this week with stories about a lift in the price of Bunnings’ sausages and home brand milk at Coles and Woolworths. If anything is going to leave an imprint in the mind of Australian consumers that inflation is out-of-control, high-priced snags and milk will.

It all means the RBA board has to make a tough call when it next gathers.

Ferris said the “question isn’t what are we going to do, the question is what aren’t we going to do”. Not tightening monetary policy fast enough is unlikely to be an option now.

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