Inflation underlines RBA’s happy place

Glenn Stevens is seemingly on a mission to cheer Australians up about the state of the economy – and yesterday’s low inflation figures have only strengthened his case.

The consumer price index data showed inflation is well and truly contained, with inflation at 2%, firmly at the bottom of the RBA’s target band of 2-3%.

International travel prices fell sharply during the quarter. Electronics prices were down 3.8% in annual terms. Education, housing and health costs are up, but food prices and the costs associated with recreation and culture are also down.

Put simply, consumer caution is forcing retailers to reduce prices, or at least keep them stable. Not great news for retailers, but really good news for households – and the RBA.

Glenn Stevens outlined his reasons to be cheerful in a speech on Tuesday, pointing to a still-strong Chinese economy, more affordable housing and an improving global economic picture.

With Spain on the edge of needing another bailout and global markets still in a state of deep, deep nervousness, there would be some who would take issue with the idea that the global economic picture is improving – although surely Stevens is right that our vulnerability is less than it was before the GFC.

Whatever your opinion, Stevens made the strong point that the RBA has room to cut interest rates like few economies in the world – and the latest inflation data underlines that.

The question is: Will Stevens look to Europe and the bad signs from Spain, and cut rates next week? Or will he wait?

Former RBA official Paul Bloxham, now chief economist at HSBC’s Australian operations, makes the point that the sort of inflation numbers we saw yesterday would typically lead to an RBA cut.

But having already slashed rates by 75 basis points this year, Bloxham argues the RBA is “ahead of the game”.

Despite strong GDP growth figures, the central bank has been prepared to slash rates to try and lift household and business confidence – and spending. And there are early signs that the cuts are working. House prices are rising modestly, business approvals are up and business credit is showing improved signs.

Bloxham argues those signs will probably be enough for the RBA to sit on its hands next month; he’s favouring a September rate cut. That’s a point of view shared by a growing number of economists.

Glenn Stevens will show his hand in less than a week. But, from his perspective, the date and direction of the next rate movement isn’t as important as the fact that he’s got the flexibility to move should the situation in Europe worsen.

I reckon SME entrepreneurs have vastly different views of the economy right now. To many, the strong official growth figures just don’t ring true with what is happening on shop floors.

But Stevens is right – we should be thankful that we do have the flexibility to respond to global shocks.

James Thomson is a former editor of BRW’s Rich 200 and the publisher of SmartCompany and LeadingCompany.