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Free AccessMNI INSIGHT: CPI Uptick Hinted In New RBA Spare Capacity View
--RBA Still Cautious on Reduced Slack Pass-through to CPI
--Unclear If June 2020 Forecast CPI Will Rise to 2.5% from 2.25%
By Sophia Rodrigues
LONDON (MNI) - The Reserve Bank of Australia's new description of spare
capacity in the economy this week which places it in the context of growth,
points to an uptick in its inflation outlook when the central bank publishes its
latest forecasts Friday.
In the cash rate statement Tuesday, the RBA talked about the central
forecast for growth to pick up a bit above 3% this year and the next, and said
that "this should see some reduction in spare capacity in the economy."
This notable reference to growth marks the RBA discussing spare capacity
beyond its usual labour market terms, though the central bank's caution over the
pass-through between reduced slack and consumer price inflation should also be
noted.
It therefore remains unclear if the RBA's forecast for inflation in June
2020 will be revised up to 2.5% when its updated projections are published on
Friday in the quarterly Statement on Monetary Policy. In February, the RBA saw
both headline and underlying inflation at 2.25% by June 2020.
The discussion of spare capacity beyond the labour market is important
because it impacts both the RBA's growth and inflation outlook.
The RBA's preference in recent years has been to refer to spare capacity in
the economy in labour market terms only, believing it to be the best gauge of
capacity pressures. Given the focus on wage growth, the discussion has always
centred around how a decline in spare capacity in the labour market is important
for wage growth to accelerate.
The RBA regards a faster rise in wage growth as important for both its
inflation outlook and for growth because a faster rise in income versus debt is
key for stronger household consumption.
--RECORD HIGH CAPACITY UTILIZATION
It wasn't too long ago that the RBA used to discuss spare capacity in
product markets in its quarterly policy statements.
The last such reference was in the November 2016 quarterly policy statement
when it said that the decline in spare capacity in various product markets was
expected to lead to a gradual pick-up in inflationary pressures, though some
product markets were likely to experience surplus capacity for some time.
The current discussion has stemmed mainly from a rise in capacity
utilization around the record high levels evident in business surveys.
The Australian Industry Group's services index published earlier Thursday
shows capacity utilization at a record high 82.4% in April, well above the
long-term average of 75.7%. In the manufacturing survey, capacity utilization
eased slightly to 79.9% in April after touching a record high in March.
AI Group's construction index also showed capacity utilization posting a
relatively high 79.3% in March, which was 0.4 points above 12-month average.
National Australia Bank's Q1 business survey showed capacity utilization
rise further to 82.7%, together with increases in firms' capital expenditure and
employment plans for the next 12 months.
--WORD OF CPI CAUTION
In 2015, the RBA published an interesting research article on capacity
utilization and the implications for investment, labor and prices. The article
showed a direct relationship between capacity utilization and consumer price
index inflation but one which is weaker than for producer prices. This may be
one reason why the RBA may be cautious in upgrading inflation.
The article concluded that for firms in the more capital intensive
goods-related industries, a high level of capacity utilisation may reveal an
impetus to hire more labour and to invest in the capital stock, while for
services firms it is more likely to reflect an incentive to hire more labour
only.
"Consequently, movements in aggregate measures of capacity utilisation are
likely to contain information about the labour market, while the implications
for business investment are likely to be identified at a more granular level."
The article said the relationship between capacity utilisation and consumer
price pressures is weaker than it is with upstream domestic price pressures
which may, in part, reflect the effect of well-anchored expectations regarding
consumer price inflation.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$,MX$$$$]
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.