Here’s a totally unscientific observation based on anecdotal evidence the Australian Bureau of Statistics wouldn’t sneeze on: Australia’s starting 2010 with a little inflationary surge that will soon have the Reserve Bank more worried than it has thus far let on.
There are people returning to work and finding haircuts and cups of coffee are a little more expensive than they were before the holiday break.
Head hunters and more mundane recruiters are hitting the phones, chasing workers they wouldn’t give the time of day to a few months ago. From construction to finance, the jobs surge didn’t end last month – and that’s without mentioning the skills-strapped resources industry.
The two major questions that follow from that are: what does the Reserve Bank think a “neutral” cash rate is in 2010?; and what is Australia’s NAIRU - it’s non-accelerating inflation rate of unemployment?
Yesterday’s confirmation of labour market strength makes a return to neutral monetary policy a given. It used to be thought that a neutral cash rate was about 5 per cent, but the banks boosting lending rates by more than the RBA’s official increases has lowered that a touch. And with higher personal debt loads, it’s arguable that the RBA doesn’t have to do as much to achieve its desired impact on purses and wallets.
So, pick another number. Maybe neutral now is more like 4.5 per cent, just three more consecutive monthly rate rises of 25 points and we’d be there.
And, as the RBA has reminded us, just because it hasn’t done something before, it doesn’t mean it won’t do it.
Also remember that the unemployment rate is supposed to be a lagging indicator, in which case the extraordinary straight-line employment growth since June is all the more amazing, even while being the sort of performance that naturally has any graph watcher thinking that there must be some sort of pause at some stage.
Whether or when the RBA moves beyond neutral though depends on what our NAIRU might be – and that becomes a more painful question for those on the fringes of our labor market.
Given the way the Reserve Bank was increasing rates before the GFC, it looks like it believes Australia’s NAIRU begins with a 4. That’s when the RBA will starting thinking about a cash rate of more than 5.
With unemployment fears removed and consumers spending, prices and wages pressures are on the up – and that was something the RBA has been saying wouldn’t happen this year.
Michael Pascoe is a BusinessDay contributing editor
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