There is a kind of sickness in Australia\u2019s coverage and discussion about the economy \u2013 an obsession that interest rates need to do something. Go up, go down \u2013 anything! Unemployment fell, interest rates must do something (apparently fewer people being out of a job is bad and needs to be cured). Oh no, inflation went up in one month \u2013 we need interest rates to do something!!<\/p>\n
We see this as well with investors \u2013 or let\u2019s be honest, speculators \u2013 who are determined that interest rates will go up next week.<\/p>\n
Even before the December CPI figures were released<\/a>, investors were betting (and that is all it is) that there was a 58% chance the Reserve Bank of Australia would increase rates on 3 February:<\/p>\n If the graph does not display click here<\/a><\/p>\n After the figures were released, showing inflation rose from 3.4% in November to 3.8% in December, the market moved to price in the chances of a rate rise at closer to two chances in three.<\/p>\n The Australian dollar also had a bit of a bump. This is because international investors who think rates will go up need to buy Australian dollars in order to buy Australian bonds and other financial instruments that will start getting higher interest returns.<\/p>\n So, when more people want Australian dollars, the \u201cprice\u201d (or exchange rate) goes up. Since the December unemployment figures showed a big drop in unemployment to 4.1%, investors have been betting a rate rise is coming.<\/p>\n If the graph does not display click here<\/a><\/p>\n The December inflation figure of 3.8% would suggest this as well \u2013 especially as in December alone, inflation rose a pretty huge 1%:<\/p>\n If the graph does not display click here<\/a><\/p>\n But let\u2019s look at that 1% jump.<\/p>\n If you are thinking that seems a bit big \u2013 perhaps even bigger than you experienced \u2013 well, you are probably right. International holidays and travel accounted for 71% of all of the inflation in December, and domestic holidays accounted for another 26%.<\/p>\n If the graph does not display click here<\/a><\/p>\n So large was the contribution of holiday prices, that if you removed those from the overall figures, inflation in December rose just 0.02%, and the annual growth of inflation would have remained steady:<\/p>\n If the graph does not display click here<\/a><\/p>\n Now, that does not mean that the RBA will put its feet up and decide things are sweet. Even without holiday travel, inflation of 3.3% is higher than it would like. But it does suggest that the bank really should not get too excited about these figures.<\/p>\n Over the past year, the big driver of inflation was international holidays and also electricity. However, while electricity accounted for about 10% of all the increase in inflation in the past year, almost all of it was due to the removal of energy subsidies in Perth and Brisbane.<\/p>\n