Sunday, 1 April 2012

Monthly Inflation Ticks Higher as Manufacturing and Construction Fall

The TD-MI Monthly Inflation Gauge shows that inflation pressures may have edged up since the start of the year, although it must be noted that some of this is seasonal. 

The Gauge rose by 0.5% in March which follows rises 0.1% in February, 0.2% in January and 0.5% in December.  The momentum on monthly inflation suggests that the official CPI for the March quarter will rise by 0.8%, which when seasonally adjusted, will be around 0.6% or so.  This would be a result consistent with inflation remaining at or maybe a touch below the mid point of the RBA target.

In other economic news today, the manufacturing PMI fell to 49.5 points – consistent with that sector flat-lining with near zero growth.  It is not good news.

Even more disconcerting is the 7.8% collapse in building approvals in February in seasonally adjusted terms which translates to 15 long months of decline in trend terms.  The number of building approvals in February is a painful 34% lower than the recent peak level in March 2010. 

All up, this news suggests that policy settings are too tight.

For the fiscal side of policy, it will remain tight whether you like it or not.  Get with the program – it will be a tight budget.

Monetary policy, on the other hand, has glorious flexibility.  The RBA Board meeting tomorrow could cut interest rates by 25 basis points – or more – with there being precious little chance of a disconcerting inflation blow out.  On the contrary, a rate cut might actually lessen the risk of inflation falling too far over the year ahead, a result which is as uncomfortable as missing the inflation target on the high side.

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