Today (March 29, 2023), the Australian Bureau of Statistics (ABS) released the latest “monthly” CPI data – Monthly Consumer Price Index – Covers the period up to February 2023. On an annualized basis, monthly all-item CPI growth was 6.8%, down from 7.4%. While this points to a sharp drop in annual inflation, it should be noted that CPI growth across all items was zero last month, a point ignored by the media. Therefore, a fairly rapid decline is expected. Yes, it turned out to be a blip and the dynamics didn’t justify the rapid rise in interest rates that we’re seeing.
Inflation falls
That was the headline in the Melbourne Times this afternoon following the release of the CPI data.
I always like the “beyond expectations” references that come up when data releases show mainstream forecasting models – which are now mostly commercial bank forecasting models.
The sharp decline is not surprising.
Most economists tend to think that inflation will be more persistent because they think the shock will then affect wage and price expectations, spreading further increases.
When the current inflationary pressures emerged a year or so into the pandemic, I was one of the few economists to say it would be a transitory event — though I pointed out that didn’t mean it would necessarily be short-lived. Pass.
The point is that we can understand what is driving the price pressures and that they will eventually dissipate – as factories resume operations and ships start heading to their intended ports.
Clearly, the situation in Ukraine has clouded this assessment, but even so, it is only a matter of time before supply chains bypass the constraints imposed by the war.
Then OPEC came along to complicate matters, but it was only a matter of time before they backed down and energy prices started dropping again.
The tentative narrative acknowledges that there are no “structural” mechanisms for propagating these supply shocks as entrenched distributional struggles between capital and labor.
It is clear that nominal wage growth is weak and workers will continue to cut real wages while supply pressures remain.
And, once supply constraints start to ease, inflation is expected to decline relatively quickly.
This has always been the case.
The only other complicating factor is profit cheating by firms, which prolongs the decline in price inflation.
ABS MEDIA RELEASE (March 29, 2023) – Monthly CPI gauge rises 6.8% in year to February 2023 – point out:
The 6.8% annual gain for the month was below the 7.4% annual gain reported in January 2023. This marks the second month in a row that annual inflation, also known as “deflation,” has been below its December 2022 peak of 8.4%.
Keep in mind this is a new series for the ABS as it attempts to generate more direct data on price levels between quarterly CPI releases.
The monthly CPI indicator has limitations – it only covers about 60% of the items that appear in the more detailed quarterly release, although the ABS notes that it “continues to improve the monthly CPI indicator where possible and has added a new indicator, the electricity price monthly series”.
So, over time, the metric will get closer and closer to the more accurate standard quarterly metric.
For now, however, it still provides good information for assessing the direction of inflationary pressures.
As the chart below shows, the annual inflation rate is heading in one direction – falling rapidly.
The blue bars show the annual rate, while the red line shows the monthly change in CPI for all items.
1. In December 2022, an annual growth rate of 8.4% is recorded.
2. In January 2023, the annual interest rate has been reduced to 7.5%.
3. In February 2023, the annual growth rate has dropped to 6.8%.
4. Data for the Christmas period is impacted by November (sales) spending, the Christmas shopping rush and the holiday month of January.
So the February result is a more reasonable indicator of how things are going.
Monthly change in CPI for all projects from January to February 2023 is zero!
zero!
The graph below shows the movement of the main components of the CPI for all projects between December 2022 and February 2023.
Overall, the initial source of CPI pressure was the rapid decline and some derivative components – such as clothing and footwear (derivatives, as transport costs were once higher).
Part of the rise in education costs is the result of price gouging by private school operators, who realize they can get ahead of rising unit costs without anyone noticing.
Electricity prices have risen because the government has refused to regulate large energy companies that divert gas supplies to world markets and drive up prices in the domestic market.
But overall, inflation is falling rapidly as supply factors ease.
So is the RBA justified in concluding that conventional monetary policy is working?
A colleague today pointed out that mainstream economists and central bank economists will claim success after the RBA has raised rates 10 times in a row after a rapid decline in inflation.
My response is that the RBA strategy calls for interest rates to affect overall spending and thus overall demand for goods and services.
In other words, they are trying to hold back spending because they claim that inflation is driven by demand pressures (too much spending).
The problem with this claim is that there is only one data series to support it – the rapid decline in inflation.
Other data moves are not married.
Unemployment, for example, hasn’t risen much.
GDP is still growing.
Yesterday (March 28, 2023), the ABS published their — Australian retail industry – Data showed that annual spending fell to 6.4% in February from 7.5% in January.
Is that a big drop?
Not really, because the comparison was tainted by the Christmas spending frenzy.
When we remove the holidays, we see that the level of total spending is comparable to pre-Christmas levels and not down.
So why is inflation falling so rapidly?
The answer is because supply-side factors that are not affected by the RBA’s interest rate policy are weakening.
The conclusion is that the fall in inflation is not to the RBA’s credit, all the central bank has done is inflict pain on low-income mortgage holders and facilitate one of the largest income redistributions in our history.
Read Science on Covid
In the face of the ongoing Covid-19 pandemic, I still receive emails abusing me for advocating strict health restrictions.
A large number of people are still dying prematurely around the world, and we don’t yet know what the “long-term” effects of the infection will be.
Some emails claim that if the government simply issued (or had already issued) the antiparasitic drug used in veterinary medicine – ivermectin – then everything would be fine.
Some even claim they took the drug in large quantities and improved from Covid-19.
Recently, the right-wing magazine “The Spectator” published this article (March 14, 2023)—— Did the ivermectin ban cost lives? (I won’t link to it to avoid them getting traffic).
The authors boldly claim that ivermectin is highly effective and that the Australian government’s failure to make it widely available means people are dying needlessly.
This is the rot that the right has been instilling, fueling the paranoia of the so-called “sovereign citizen movement”, whose members are popularly known as “cookers” among those with a few brain cells.
Some of the “studies” they cite never actually happened, or were retracted due to scientific fraud.
I’m glad that those who were tricked into taking the drug “got better”, although as stated, we don’t know the long-term effects of the infection and its impact on our major organs.
But solid research clearly shows that they spend their cash on fraud.
In 2021, the British Guardian reported (September 24, 2021)—— Fraudulent ivermectin study opens new battleground between science and misinformation – This strongly suggests that the claim that ivermectin is an effective drug against COVID-19 is based on flawed research.
On February 20, 2023, the Journal of the American Medical Association (JAMA Network) published an article—— Effect of higher doses of ivermectin for 6 days versus placebo on duration of recovery in outpatients in a randomized clinical trial of COVID-19A – Here are the best scientific findings on the subject so far:
…the posterior probability that ivermectin reduces symptoms lasting more than 1 day is less than 0.1%
In other words, it has no effect.
This JAMA Study Reinforces Findings Published in The New England Journal of Medicine (May 5, 2022) – The effect of early treatment with ivermectin in patients with Covid-19 – It used a “double-blind, randomized, placebo-controlled, adaptive platform trial” and found that “ivermectin had no significant effect on reducing the number of people hospitalized with Covid”.
Music – Nina Simone
Here’s what I’ve been listening to this morning at work.
I will be moving soon and going through all my old records has been a really fun exercise.
So I had a mini Nina Simone period where I kept digging up her old albums and listening to them again.
This song – like a woman – Written around 1965 – bob dylan – and appeared on his 1966 double album – blonde – This is my favorite record of his.
This version was recorded by — nina simon – and appeared on her 1971 album – the sun is coming (RCA Victor) – This is where I first heard it.
Enough for today!
(c) Copyright 2023 William Mitchell. all rights reserved.
