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‘Numbers, numbers everywhere’: Interest rate rise likely, but what does it all mean?
00:16:06
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- [00:05]
A
Inflation has risen again and the markets are already tipping that interest rates are likely to increase next week. In response, I'm Tammy Mills filling in for Samantha Salinger Morris. And you're listening to the MORNING EDITION from the Age and the Sydney Morning Herald. Today, senior economics correspondent Shane Wright explains what is driving the spike in inflation and what it says about where Australia's economy is headed. It's Thursday, January 29th. Well, Shane, thanks for joining us.
- [00:45]
B
It's always a pleasure to talk to you, Tammy.
- [00:47]
A
Inflation figures were released on Wednesday. So let's start with what they were.
- [00:52]
B
Numbers, numbers, just so many numbers. But ultimately there's two really important ones. The one is the headline rate, which takes into account everything. And that showed inflation lifted again through December and took the annual rate to 3.8%. But the Reserve bank, its job is really at the moment looking at underlying inflation. And for those who aren't aficionados of economic jargon, the underlying inflation sort of clips out the things that are going up the most very quickly and those that are coming down. And that actually lifted slightly to 3.35%, which is a bit above what the Reserve bank had been expecting. So the response that we've seen immediately from all these numbers has been, oh, my God, the Reserve Bank's probably going to have to take some action when it meets next week.
- [01:48]
A
Okay.
- [01:49]
B
And they'll be going through these numbers and some of the other numbers that have been flooding around, such as unemployment, what Donald Trump's been getting up to, like these figures that we've seen in the inflation data, actually shows some of the impact of Donald Trump policy. And then Tuesday afternoon, Reserve Bank Governor Michelle Bullock will get up about half past three and explain probably why they've had to lift the cash rate from 3.6% to 3.85%.
- [02:17]
A
So before we get into that, can you go back to the inflation figures and tell us what the increase actually means and what the reason behind behind that hike is?
- [02:28]
B
As I said, numbers, numbers everywhere. For instance, the prices of international flights jumped by a bit over 24% in a single month. Like a lot of that is because what do most Australians do in December or January? Take a holiday somewhere. So it looks like that is the single largest increase in monthly data that we've ever seen. Domestic flights also lifted 10%, which is a very substantial increase as well. So look, if you want someone to blame, head down to Qantas, head down to United, head down to British Airways and have a real crack. So that's one key issue. Another Key one has been what's going on with electricity. The last major subsidies that have been washing out of the system have been in Queensland and in Western Australia. So that lifted the inflation for electricity over the last 12 months, lifted by 21%. And most of that is to do due to the end of these subsidies, which occurred in the last six months. It is no surprise that the highest inflation rates at a capital city level are actually in Brisbane, where it's more than 5%, and in Perth, where it's 4.4%. By contrast, in Melbourne, it's 3.1%. So they give you a really good idea because the electricity prices have been going on, the subsidies have been state by state. And so this gives you an idea of what's going on. I mentioned Donald Trump prices for beef have been and lamb have climbed by more than 10% over the last 12 months. The Bureau of Stats says this is because we are effectively shipping as many cows as we can, or bits of cows, to Donald Trump to feed hungry Americans, because one, they've had a drought which has really reduced their cattle herd, and two, we've got a lot of cows. And the best prices for the moment, even with Donald Trump's tariffs, are in the United States. So they're really big key factors. And the other big one on the upside is actually what's going on in housing and housing construction, because we're trying to build a lot of homes. You try to do a lot of things at once. That means there's a squeeze on the resources. We've seen some of the tariff problems that have been created by Donald Trump feeding into the prices of some of those goods. But we're still trying to build a lot of homes all at once. So that's feeding through into the cost of building a new home at the moment.
- [05:02]
A
And back to basics, because I am not an economics expert at all. What does inflation actually measure? And can you tell us how a rise in inflation might affect us day to day?
- [05:14]
B
So think about young Tammy going out shopping in the mean streets of Melbourne, for instance, and you've got a basket, a basket of everything that you spend your money on every week. So there's like the single largest expense for most households is petrol, and petrol prices actually lifted a little over the last quarter. Housing, which means everything from the utilities bill to the building of a new home to rents, it takes up more than 20% of that basket. Then you've got your fruit and veg, you've got childcare, for instance, which we've seen there's been a lift in prices for childcare. So services from the vet. Vet services have been going. Been lifting pretty heftily ever since COVID So it's all measured in that ultimately the Reserve bank wants to keep the rate of inflation growth between 2 and 3%. And so some people say, why don't you want prices falling? Well, we had a real go at reducing prices. It was called the Great depression through the 1930s. So if you actually push prices down, people stop spending because they think, oh, prices are going to keep coming down and down and down. I won't have to spend as much. So you stop the entire economy as well. Prices going up and up and up really hurt, particularly people on low incomes or fixed incomes because they can't buy as much. They can't buy as much as they need or want. So Reserve bank says, sweet spot if for this country is between 2% and 3%, we are not near that right at the moment.
- [06:53]
A
After the break.
- [06:55]
B
So there are people thinking maybe two rate rises this year would pull you up and then you may not see rate movement for some time.
- [07:16]
A
And so then how does the inflation rate correlate with interest rates? Because you were talking about an RBA meeting next week and the cash rate. Explain to me what's going on with the meeting next week and what we're expected to see out of it.
- [07:30]
B
So the cash rate effectively is setting the cost of money in this country now for the last 30 odd years. The Reserve bank, along with most other central banks, says the way to target inflation is to target the price of money. So if we push up the price of money, like it's only two years ago that the cash rate was, well, that was 4.35%. We go back to 1989, 1990, when it was 16, 17, 18%. So that the idea then is to lift or reduce the price of money, the cash rate to affect those, particularly with mortgages. They're the ones who really are in the firing line to reduce their spending or increase their spending. That's how the Reserve bank thinks about it.
- [08:19]
A
Okay, and so what are you tipping for next week then?
- [08:23]
B
We've got into this whole mindset that a cash rate of 3.6% is normal. When John Howard famously declared interest rates will always be lower under a coalition government. So that's less than that's 20 years ago. The cash rate was at 3.85%. That was the record low. So that's been affected by the fact that Australians have the largest mortgages going around. We get really heavily affected by what's going on with interest rates, but it also affects the value of the currency. So the Australian dollar for instance has hit a three year high of US 70 cents just before the announcement on the inflation figures. And that's a reflection of where investors think interest rates are going to go and the relative strength of the United States economy. There's concerns about what's going on there. It affects business decisions. So we talk about people with mortgages because that's about a third of the population. But there's another third who don't have a mortgage, who have savings and they benefit from higher interest rates as well. They probably don't spend quite as much as people with mortgages, but people on a fixed income think of a self funded retiree benefits from higher interest rates in that regard. So that's all mulling around for the Reserve bank next week. Financial markets now they before the meeting they had the cash rate, a 60% chance of the cash rate going up. They now put it at about 70%.
- [09:59]
A
And is that unexpected do you think, because it was only what in August last year that the rate was cut?
- [10:05]
B
Yeah, but we've seen the last, like the last two inflation reports have shown yet there is definitely inflation going on. Another issue is what's going on in the jobs market. Unemployment. Last week we got a read showing it had fallen to 4.1%. But even that, like in economics, people talk about the two handed economists. On the one hand unemployment has fallen to 4.1% but on the other hand the rate of job creation is really slowing down. Over the last 12 months job growth was 1.2%. The previous year it was more than double that. So even though the unemployment rate's coming down, the number of jobs being created, the rate of growth is actually slowing. So those two things are telling you different things about what's going on in the jobs market.
- [10:54]
A
Okay, and so what's the expectation for this year then? Do you think there'll be a stabilization in interest rates? What do you think's going to happen?
- [11:04]
B
It's hard to see them getting it back over 4%. Like I think you can see a rate increase but then you go hold on, the overall economy is not growing that quickly. So that's when the Reserve bank says oh, hold on, we have to balance what's going on in the jobs market, the overall economy and with what's going on in inflation. So the Reserve bank is not fixated just on one number and goes, that's all we have to worry about. They have to worry about a lot of other things. So there are people thinking maybe two rate rises this year would pull you up and then you may not see rate movement for some time.
- [11:43]
A
And how does Australia compare with what's happening with the rest of the world, like how the UK is tracking with inflation? I don't even know if you can compare Australia to the US anymore in terms of those figures.
- [11:56]
B
Yeah, so say in America, their cash rate, they measure it, it's 3.5 to 3.75%. They have a band. So we're effectively the same rate as the United States. In Britain, the economy is in much worse condition and inflation is starting to come down and that's reflecting just how poorly the British economy is going. The Reserve bank of Japan is about to lift interest rates. Like it'll be probably US and Japan who are lifting rates at the moment. New Zealand has just come out of a two year recession but they've still got inflation problems there. Like they've been cutting interest rates but they may have to hold back. Canada for instance, Mark Carney and he, like a former central banker who's now the Prime Minister of Canada, all sorts of problems because of what's happening in the United States. So their, their economy is really slowing. They've got unemployment around 7%, interest rates are falling there. Europe, they've been able to bring down interest rates a little bit. But again, what's going on in the tariff war with the United States makes anything clean really difficult to pick up.
- [13:12]
A
And just lastly, just a small, small final question for you, Shane. What's all this saying about where the Australian economy is at right now? Should I be feeling positive or, or not?
- [13:23]
B
You should always be positive, Tammy. Should always be. Why would you want to be negative? Look, the Australian economy is growing, partly being driven by population growth, which is a whole other story. But you can see that the private sector is really starting to pick up the debate or the discussion over say AI and data centers. Australia has the fifth largest number of data centres in the world and the number being built here would blow your mind. Like there has been this huge ramp up in private investment that's going on right at the moment. We can see consumers. Yes, our friends in the airline industry managed to push up prices by 24% on international airfares. They could only do that if Australians had the money and wherewithal to go on an overseas trip. So obviously we know that people have been saving money. The economy is, it's tracking along. I wouldn't say it's a four lane freeway, more like a country road with okay, the lines are marked so you're not going to run off into the wild. But it's not the best. But it's not the worst by any stretch.
- [14:36]
A
Well, thank you so much, Shane, for your time.
- [14:38]
B
It's always a pleasure, Tammy. You're a good one.
- [14:54]
A
And in other news today, a little known Queensland backbencher says he will force a national party leadership spill in Parliament next week following the dramatic split from the Liberals. And pro Palestinian activists are already already organizing protests ahead of a visit from Israeli President Isaac Herzog, who plans to meet politicians and Bondi massacre survivors early next month. You can read more at theage.com or smh.com and while you're there, consider subscribing to us and save 50% for the first six months on our premium, digital and essential weekend packages to unlock award winning journalism. Plus subscriber favorites like puzzles, good food and Traveller T's and C's Apply. Today's episode was produced by Chi Wong with help from Julia Carr Catzel. Our podcasts are overseen by Lisa Muxworthy and Tom McKendrick. If you like our show, follow the Morning Edition and leave a review for us on Apple or Spotify. Thanks for listening.
- [16:01]
B
It.