Michael Blythe, the Chief Economist at the Commonwealth Bank, talks about the easing in inflation, and what that means for interest rates
Introduction: Inflation cools
Ross Greenwood: Let’s now go to those inflation numbers and what they really mean to you and also potentially the future of interest rates. You’ve heard from Philip Lowe there, the Reserve Bank governor and what he says. Let’s now go to the Chief Economist of the Commonwealth Bank, Michael Blythe, who is on the line. Michael, many thanks for your time. These numbers today, annual inflation 1.9% below expectation as we have said, this surely was a bit of a surprise to the markets?
Interview: Michael Blythe, Chief Economist, Commonwealth Bank
Michael Blythe: Yes, it certainly was and we were expecting inflation to have turned the corner and to be slowly lifting from here but the message from today’s numbers is very much that low inflation print is locked in.
Ross Greenwood: It’s really curious to see the areas that is continuing to fall in price. So petrol prices, transport costs are down, communication cost it seems almost inexorably that we’re getting cheaper telecommunications, recreation and culture, but even food and non-alcoholic beverages which implies that supermarket prices continue to be under significant pressure. These are the areas really where Australians are probably getting the very best deal that they’ve had in their lives.
Michael Blythe:Yes, that’s right, we’re seeing competitive pressures across a range of sectors in Australia and that’s reflected in these very low price outcomes. You can see it in the supermarkets and you can certainly see it in the clothing stores where I think today’s numbers mark the lowest of the price index for that clothing component in about 28 years-
Ross Greenwood: Just incredible–
Michael Blythe:-[crosstalk] how far these things have moved.
Ross Greenwood: In other words, the cheapest clothing as compared with your salary, say for example, that you have experienced in 28 years, it says everything about the affordability of fashion these days. Just the one thing, can you take me– I note the governor and we’ve played some of those grabs a little earlier. He was talking about the fact that Australia does not have to follow the rest of the world with higher interest rates. Are there any pressures still building up potentially in our economy which might lead the Reserve Bank to higher interest rates over the medium term?
Michael Blythe:Well, there’s a couple of things to watch. I don’t know there’ll be enough to actually trigger a rate rise. But its pretty clear that business import costs are rising because of higher power prices. We’re going to see that in our utilities bills, as well, when the next quarterly reading in the CPI comes through. The very strong residential construction boom we’ve had has pushed up prices in that segment. There are a few little bits and pieces of inflation running at the moment, not big enough, no, although to change the overall picture and the rate rise is still seem a long way off in Australia.
Ross Greenwood: While you’re talking about consumer products and in particular you’re talking fashion here, with the stronger Australian dollar, that would imply to me at least that it’s cheaper to bring imports into the country. Most of our clothing and foot wear is imported and on top of that also the desire for people to online shop overseas is going to be enhanced. My gut feel is that there’s even potentially more of these lower price pressure coming in in the next quarter or so, as a result of that higher Australian dollar. Is that on the money?
Michael Blythe:Yes, I think so. There’s a big structural changes going on at the world economy. It’s being accentuated by the rising dollar and it means that imported component of the CPI is running well below the domestic component of the other CPI. That trend looks like it’s set to continue.
Ross Greenwood: Just a final one, have you changed your interest rate outlook at all in regards to these numbers carried out today?
Michael Blythe:No, well we’ve thought low inflation is locked in for quite a while. Rate rises will come eventually, but we’re unlikely to see them in Australia before the end of 2018.
Ross Greenwood: And you don’t think this relatively low inflation might even again tempt the Reserve Bank if it thinks things are sluggish to cut interest rates again?
Michael Blythe:The RBA governor pretty definitively ruled that out today. As long as the labour market remains in reasonable shape and that’s what we think will happen, then the temptation to cut rates just won’t be there. Particularly, given the risks of flying into the housing market again.
Ross Greenwood: Michael Blythe is the Chief Economists at the Commonwealth. Thank– Always great to have him on the program. Michael, we appreciate your time.
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