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The RBA has no choice but to whack us with an interest rate rise: Kohler

The June quarter consumer price index is a disaster. It means the “cautious consumer” that Glenn Stevens was talking about on Tuesday and the high Australian dollar have not turned into lower inflation; the disinflation from the GFC is finished and Australia’s dreadful performance on productivity over the past decade is being brutally exposed. The […]
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The June quarter consumer price index is a disaster.

It means the “cautious consumer” that Glenn Stevens was talking about on Tuesday and the high Australian dollar have not turned into lower inflation; the disinflation from the GFC is finished and Australia’s dreadful performance on productivity over the past decade is being brutally exposed.

The RBA will now have to whack us all over the head with the blunt instrument known as interest rates.

The financial risks in Europe and the US, the strong currency and weak domestic consumer demand should have led to an interest rate cut in the next few months. The case for this presented last week by Bill Evans of Westpac looked convincing.

In fact, it looks like Business Spectator‘s Adam Carr was correct all along: inflation is on a one-way trajectory upwards and interest rates are about to start moving up again, probably in November, possibly earlier.

It was especially disappointing, and superficially mysterious, that tradeable goods prices rose 1.3% in the June quarter, despite a 20% appreciation in the exchange rate. Retailers are not passing on their currency gains.

Why the hell not? Isn’t online shopping and cautious consumers repairing stretched balance sheets emptying out their stores? Well yes, but the problem is that their costs are rising as well.

Australian unit labour costs are up 8% year-on-year according to Josh Williamson and Paul Brennan at Citi Investment Research, fuel prices are rising sharply and product prices out of China are going up faster than the exchange rate because of rising labour costs there.

Retailers are caught in a bind. Their own lack of discounting, forced on them by rising costs, could in turn force the Reserve Bank to raise interest rates and make life even harder for them.

It means the slow parts of the two-speed economy are likely to get slower. As we saw at 11.30 AEST yesterday when the CPI was released, and the Australian dollar jumped from 109.5 to 110.5 in five minutes, the already strong exchange rate will be super-charged by rising interest rate expectations and an actual hike in deposit and lending rates will further encourage savings at the expense of consumption.

2012 should have been the year when the bacon is brought home: rising national income from the terms of trade boom combined with the mining investment boom kicking in to produce full employment.

In fact, it’s already shaping up to be a bit of a shocker, with spot recessions breaking out amidst rising inflation and interest rates, rising costs, and weak consumer and business confidence and smack in the middle of all this… a carbon tax on July 1.

This article first appeared on Business Spectator.