As inflation falls, the Reserve Bank is Missing in Action
With inflation within the RBA’s target range, interest rates should be cut, but unfortunately Australians will have to wait for the Reserve Bank board to get back from holidays.
Today’s inflation figures revealed the official CPI is well within the Reserve Bank’s target range of 2% to 3% and underlying inflation is coming down at a solid pace. These figures will have Australians looking forward to a rate cut, but the RBA is making them wait longer than they should.
Every other year before now, the Reserve Bank board would have been meeting next week on the first Tuesday of February. For some apparent reason that has not been shared with the public, the RBA board will only meet in 3 weeks time on the 17th and 18th of February. This will mean that the RBA board will not have met for 2 months since its last meeting – crucially at a time when inflation has been falling and households are dealing with interest rates set at levels that were put in place when inflation was 4.1%, not the current level of 2.4%.
The December quarter inflation figures reveal just how behind the times is the RBA. In the final three months of 2024, overall prices grew just 0.2% – that would annualise to just 0.8%! We are at a point where prices are rising slower than the Reserve Bank aims for them to rise.
Australia’s inflation has also fallen faster than in the USA. This is mostly because Australia’s inflation problem has been helped by government policy.
While some conservative economists have attempted to argue that government spending has fuelled inflation, today’s figures show government policy has directly led to inflation falling.
The government’s energy subsidy has worked as hoped. The subsidy helped bring down inflation at a time when prices were rising too fast, and reduced cost of living pressures on households when they needed most help.
The measures have shown that dealing with inflation is not the preserve of only the Reserve Bank. And that is just as well, given the Reserve Bank seems to be in no hurry to perform its function.
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