Are we now in danger of inflation going below the Reserve Bank’s target band? If so, hard questions need to be asked — and the answers won’t look good for governor Michele Bullock.
The June quarter CPI released yesterday came in at 2.1% in annual terms, down from 2.4% in the March quarter. It’s the lowest level since the middle of the pandemic. The trimmed mean reading, which excludes volatile items and is preferred by the Reserve Bank, fell from 2.9% — just within the bank’s formal target band of 2-3% — to 2.7%. According to the Australian Bureau of Statistics, annual goods inflation was just 1.1% in 2024-25, down from 1.3% in the previous quarter, while annual services inflation was 3.3%, down from 3.7% to the March quarter.
But the monthly reading for June, released separately (CPI will move fully from a quarterly to a monthly basis in November) was just 1.9%. A year ago the June quarter headline rate was 3.8% and the trimmed mean rate was 4.1%. The monthly indicator for June 2024 was 3.8% as well.
Not merely has inflation dropped dramatically, it’s now in real danger of going below the target band.
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And we’ve been there before — from 2015 to the eve of the pandemic, when CPI rose above 2% in annual terms in just three quarters across the whole period, but the RBA under Glenn Stevens and Philip Lowe avoided rate cuts like the plague, delivering savage wage stagnation to Australian workers.
If CPI does fall below 2%, then clearly Bullock and her team will have learnt nothing from that experience of deliberately keeping monetary policy too tight. There are some jobs where it’s OK for leaders not to learn from past mistakes. But head of the Reserve Bank isn’t one of them.
The more immediate lack at the RBA is ticker. Believe it or not, the RBA forecast the lower-than-expected inflation result in the May edition of its Statement on Monetary Policy, which forecast headline CPI of 2.1% and a trimmed mean of 2.6%. But clearly the bank didn’t have the guts to back its own forecasts when it met in early July and decided it needed “a little more information” before cutting rates. Instead, Bullock invented a third mandate of “gradualism” to justify continuing to punish households despite plummeting inflation, the highest unemployment in four years and general weakness in demand.
Bullock’s gradualism, to the extent it was ever a viable approach, now looks increasingly like the pride and defensiveness of someone who has made the wrong call.
This is the lesson of Treasurer Jim Chalmers’ monetary policy reforms, which from the pointless review of the RBA through to the recent switch to a new monetary policy board, have attracted an awful lot of coverage since 2022. You can fiddle with the structures, you can appoint new people — but if the bank itself lacks the ticker to back its own forecasts, you’ll be stuck with a do-nothing outfit like we endured from 2015-20.
One more thing. Plenty of Crikey readers — and our readers, whom we love, are dominated by older asset owners, albeit more progressive than the ones who read the Financial Review and The Australian — think we’re too hard on the RBA and its failure to cut rates. But inflation has been outside the RBA target band for most of the past decade. That target band is the key performance metric for the bank. It’s there in black and white (OK, black and blue). And this is not an institution which has a good record over the past decade.
That it might be making the same mistakes again — mistakes that will cost people jobs, shutter small businesses and see people default on their mortgages — is a matter of serious concern. It’s OK for us older asset owners, we’ll be fine. But if you’re younger, you’re struggling with a mortgage and a precarious job, if you don’t have the cushion of a lifetime of wealth accumulation, this is near life and death stuff. And that requires strong accountability from the people making decisions.
Is the RBA up to the job? Or are we being too harsh?
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