Australian May inflation expectations 3.3% (prior 3.9%)

Author: Eamonn Sheridan | Category: News

Melbourne Institute data

Oh wow …. a negative for AUD

A concern for central banks is to keep inflation expectations anchored. In a nutshell, and I've covered this before:
  • The argument is that inflation expectations can become self-fulfilling.
  • I think its more relevant during times of increasing inflation - people see inflation rising so they tend to buy more quickly, thus prompting prices to rise faster.
  • People expect faster inflation (i.e. its 'unanchored' ... rising quickly)
  • On the flipside, if inflation is either very low or in deflation (i.e. general falling prices), people hold off purchasing 'cause there is no rush if prices are falling, and again the argument is this behaviour can feed on itself and grow as a problem.
  • People expect falling prices to fall harder ('unanchored')
This is sharp drop on the month and heightens the risk that expectations are kept anchored. This may well be of more importance than the jobs data later. 

I've argued in past months (years?) that the RBA is complacent on inflation, its missed target for going on 3 years now. This may be enough to give them a jolt out of such complaceny. 
They have said they are watching the employment market, this might give them a reason to pay some attention to the other leg of their mandate. They only have two mandates, inflation and jobs. On the jobs growth I've given them plaudits many times. But on inflation, 3 years of misses is a poor showing indeed. Who else has a job where missing targets for 3 years is shrugged off?

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