The US December CPI and the peak in Australian inflation
Plus, Howard and Costello’s annual Cabinet papers outing; and Congressional stock trading
The US December CPI came in as expected at -0.1% on the month and 6.5% on the year compared to 7.1% in November. CPI less food and energy came in at 0.3% m/m and 5.7% y/y compared to 6% y/y in November. All of which remains consistent with the US inflation process having peaked. The six-month annualised rate for the headline CPI is now just below the Fed’s target of 2%.
The Cleveland Fed’s trimmed mean measure accelerated relative to November with a 0.4% rise in December, but moderated to an annual rate of 6.5% compared to 6.7% previously. Putting that into our model for the Australian trimmed mean inflation rate still yields an estimate of 1.6% q/q and 6.6% y/y for Q4 compared to 1.8% q/q and 6.1% y/y in Q3. This is unchanged on a rounded basis from what we were expecting based on the US November CPI.
The ABS monthly indicator of trimmed mean inflation accelerated in November to 0.5% from 0.2% in October, with the annual rate also rising from 5.4% to 5.6%. If we forecast the Q4 trimmed mean inflation rate based on the ABS partial measure, we get 1.5% for the quarter, although this estimate obviously excludes the observation for December, which we don’t get until the release of the Q4 CPI itself on 25 January.
Since we now have a monthly partial trimmed mean estimate from the ABS, we are going to average our unrounded estimates based on the Cleveland Fed and ABS models, which yields a trimmed mean inflation rate of 1.5% for the quarter and 6.5% for the year compared to 6.1% in Q3.
This is identical to the RBA’s forecast for Q4 in its November Statement on Monetary Policy. I have not seen consensus estimates for the Q4 trimmed mean, although I have seen individual estimates ranging from 1.2% to 1.7%. My sense is that our forecast of 1.5% for the quarter will be either at or slightly below the market median.
This is all consistent with a year-end peak in the domestic inflation process, somewhat behind the US, but I doubt this will buy us much when the RBA Board meets on 7 February, with another 25 basis point tightening likely. At the time of writing, the market is giving a 61% chance to a 25 basis point tightening, taking the official cash rate to 3.35%.
Howard and Costello’s annual cabinet papers outing
Troy Bramston once again used the release of the Cabinet papers at the turn of the year to buttonhole former Prime Minister John Howard and former Treasurer Peter Costello on the RBA. Costello is quoted as saying QE had been an ‘unmitigated failure.’ But that is obviously wrong. The RBA would not now have an inflation problem if QE had failed. The RBA is contending with the fact that QE succeeded too well. The clear implication for future shocks is that we should use QE more, not less.
This time last year, with the release of the 2001 Cabinet papers, Howard said that during the pandemic ‘We cut interest rates too far too quickly…Our interest rates were brought down too low, too soon.’ Since we are all rehashing January 2022, this is what I said then, before the surge in inflation and the RBA’s abandonment of forward guidance:
Howard and Costello are also critical of the RBA’s use of calendar-based forward guidance on the basis that it will be harmful to the Bank’s credibility if it can’t deliver on the commitment to hold the cash rate steady out to 2024. I would suggest that not meeting the inflation target is the larger blow to the Bank’s credibility. I’m not a fan of calendar-based guidance, but it is not hard to see why the RBA would want to frame policy in these terms. If your view of the monetary policy transmission mechanism is tied to the expected cash rate, then you want to know how much easing you are pulling forward through forward guidance. The only way you could justify 50 (later 65) basis points of easing in response to the pandemic shock is to commit to holding the cash rate at these levels for an extended period. The duration was meant to compensate for the small magnitude of the change. That’s all defensible enough, but highlights the extent to which forward guidance was doing the heavy lifting that the RBA’s preferred operating instrument could not. If Howard and Costello don’t like forward guidance, they are going to have to accept much larger reductions in the cash rate like we saw in, oh, I don’t know, 2001.
House Economics Committee report on the RBA
The House Economics Committee handed down its report on its review of the RBA’s annual report just before Christmas. The report was perhaps a little more pointed than the usual summary of the RBA’s appearances before the Committee, saying that ‘the committee expects the RBA to continue to closely examine lessons learnt from its approach to forecasting, its use of modelling, and its approach to communication—and to consider how these can be improved. Australian households, workers and industries—facing intensifying cost-of-living pressures and challenging work and business conditions—deserve no less.’
Congressional stock trading
The Unusual Whales 2022 Congressional Stock Trading Report documents the phenomenon of members of Congress outperforming market benchmarks in their stock trading, with the strong implication they are trading on private information. There are a few instances of leveraged shorts, implying some members of Congress were effectively shorting the economy. In the spirit of ‘if you can’t beat them, join them,’ there are ETFs designed to trade right along with them. Full marks to whoever came up with the ticker symbols NANC and KRUZ. There is, however, mixed evidence overall in relation to whether members of Congress do in fact outperform. Needless to say, it would be better if they didn’t.
Jonathan Kearns is leaving the RBA to take up the new role of chief economist at Challenger Bank.
Mastodon—and the pros and cons of moving beyond Big Tech gatekeepers. A reminder that you can find me at the econtwitter.net instance at Mastodon: @firstname.lastname@example.org. I highly recommend using the Elk Mastodon web client.
Hayekian welfare states: explaining the coexistence of economic freedom and big government.
RIP Bennett McCallum. I learned a lot from reading his work and he was a big influence on contemporary monetarist thought. Here is a piece Ben wrote on monetarism for the Encyclopedia of Economics.
A handy app for simulating retirement decumulation strategies, including Vanguard’s dynamic spending approach.
Memes and themes: