The Price is Right was a well-known game show where contestants had to guess the price of an item (a lot harder in the pre-Amazon days). It was good fun, but there were few economists on the show, as they are more worried about prices throughout the economy. The RBA has deemed 2-3% the right pace of price growth, other countries a little lower (around 2%).
The most recent data suggests that inflation in Australia in the March quarter had nudged back into the 2-3% target band. Sure, some of that was driven by movements in a few volatile items. But if you look through that volatility most of the various “underlying” measures told a similar story of a (modest) pickup in prices.
But the decent rise in prices also shows that (at least up to mid-March) the Australian economy was in reasonable shape, and widespread discounting (outside some tourism-related areas) was not necessary.
And well before COVID, the trend was for a falling proportion of goods and services to be rising by less than 2% per year and a growing proportion by more than 3%.
Typically the March quarter CPI number would have led to discussions about the need to raise interest rates. But now the economy will suffer a significant hit in the second quarter that is widely expected to lead to lower prices.
Significant prices over the year to March 2020
Largest annual % falls over year to March 2020
Computer equipment -5.4%
Largest annual % rises over year to March 2020
Other meat 9.2%
Credit and monetary growth
One of the under-appreciated pieces of data is the monthly credit and monetary aggregate numbers. They tell the story of both the amount of borrowing in the economy and the flow of money. They are worth keeping an eye on.
In March there was a significant rise in credit. There was an increase in mortgage borrowing by both owner-occupiers and investors. But the biggest jump in credit was lending to firms. Businesses increased their borrowing to improve their liquidity position as concerns about the impact of COVID rose. Money also was likely shifted into transactions accounts, as households and firms wanted to make sure cash was readily available.
As with many economic variables, the outlook for credit growth over the next few months is uncertain. The aim of the Government guarantee programs is to increase lending (particularly to SME’s) in coming months. But for those firms still with some cash flow, increased risk aversion will see reduced lending and possibly quicker repayments. And the slowing of the housing market will certainly lead to less mortgage lending in the coming months.
The price is not yet right for the Australian economy. But at least now a few things are going right. And this means we can look forward to future episodes with at least some confidence.