Why is our inflation going down so slowly?

Mortgage holders are in for yet more repayment pain as an uneasy Reserve Bank faces off against inflation that just won’t go away.

The hints began a week ago when RBA boss Michele Bullock had a “fireside chat” with an audience in Sydney — she complained that repeated spikes in petrol prices were not just stopping inflation from coming back down but were causing people to expect high inflation.

“Typically when we think about shocks to supply that increase prices, you’d think: ‘Well, that’s probably okay; it’ll wash out.’ But the problem is that we’ve just got shock after shock after shock, and the more that that keeps inflation elevated, even if it’s from supply shocks, the more people adjust their thinking,” she said. “And the more people adjust their inflation expectations, the more entrenched inflation is likely to become. So that’s the challenge.”

What followed was her big debut speech on Tuesday night, when she made it crystal clear that she will pull the rates trigger if needed: “The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation.”

Public communication is a vital weapon in any central bank’s armoury, and those two communiques aimed to make it clear that the new RBA boss isn’t afraid to raise rates if needed. So when the latest inflation data came out yesterday, it dropped like an axe on to the necks of borrowers. The official quarterly inflation data was bad, but the monthly inflation indicator was even worse.

The official series fell from 6% to 5.4%. The monthly indicator is less comprehensive, but much more frequent.  It shows that in the past three months, inflation has surged. It was 4.9% cent back in July, 5.2% in August and a concerning 5.6% in September — i.e. it’s going the wrong way, as this chart shows.

That’s a bad trajectory — and it’s why the RBA is almost certain to act before the end of the year. Major banks scrambled to update their forecasts for the next board meeting. “We now expect the RBA to increase the cash rate by 25bp in November to 4.35%,” ANZ analysts said in a note circulated to clients minutes after the CPI data was published.

Every rate rise costs $108 a month in extra repayments to a household with the average new mortgage in NSW, assuming banks pass it on. That’s not a lot by itself, but given that rates have been raised so many times, the cumulative impact is around $1,500 a month in extra repayments.

Inflation is our nemesis. But which prices are the ones making our lives worse? Here are all the prices in the economy, indexed to 2017. You can see the problem certainly isn’t your phone bill or your clothes.

Prices have risen a lot on average since 2018. Some have risen steadily — and some, like fuel, are very volatile. If we break this down, we can see goods have risen far more than services, and that tradeables are rising more slowly than non-tradeables.

The fact that non-tradeables are rising more steeply than tradeables suggests the RBA is right to pursue a policy of rate rises. While tradeable prices are set in global markets, non-tradeable prices are set here at home by businesses who feel the effect when a household tightens its budget to afford its mortgage.

But that’s the bigger picture: the medium term. The big problem right now is oil. Petrol prices are at giddy highs because a barrel of oil costs US$90, and the number of Aussie dollars you need to scrape together to equal US$90 keeps going up. Our currency is weak and that is bringing us even higher imported inflation.

The idea of rate rises is they lift our currency and make imports cheaper. They certainly would do that if other countries weren’t raising rates at the same time. But around the world, central banks are all mashing the + button and that means our rate rises aren’t enough to move global forex markets and give the humble Aussie dollar a boost. All we can say is rate rises have stopped our dollar from falling below US50 cents.

For now, our inflation situation depends much more on stability in the Middle East than you would like. If the violence in Gaza spirals into a broader regional conflict, expect the price of oil to skyrocket. That will force the RBA to consider raising rates even more.