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Reserve Bank has both a date and data dilemma

Interest rate decisions and inflation data are currently affecting financial markets in profound ways, after a decade of far less relevance. It is surprising, therefore, that although Australia's Reserve Bank Board meets every month except January, Consumer Price Index (CPI) data is only available quarterly. Even more mysterious, the US Federal Open Markets Committee (FOMC) does not meet for a further two months despite the market hanging on every word its Chairman utters.

The Reserve Bank moved rates only once (in November 2020 by 0.15%) for over two years between March 2020 and the start of its current tightening in May 2022. As shown below, the last increase was in 2010. But in a spectacular turnaround from the expectation of no changes over 2022, 2023 and into 2024, Philip Lowe has delivered four consecutive increases with more to come.

Reserve Bank Target Cash rates

The world's most powerful central bank is the US Federal Reserve, and its FOMC holds only eight scheduled meetings a year. At its last meeting, the increase in the Fed Funds was a healthy 0.75%, perhaps necessary to get 'ahead of the curve' on inflation because of the long wait to the next meeting. At least the Reserve Bank can be more reactive to market and economic conditions with some flexibility. Hence following the most recent increase of 0.5% to 1.85% at its August 2022 meeting, it said:

"Inflation is expected to peak later this year and then decline back towards the 2–3 per cent range ... The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market."

The phrase "not on a pre-set path" was well received and the stockmarket and bond market rallied.

Lewis Jackson of Morningstar recently looked into the timing of the Reserve Bank's data sources.

What about the Reserve Bank's CPI data?

The Reserve Bank is steering an overheating economy and its most important crystal ball is past the use-by date.

It’s bad enough that Governor Philip Lowe and the Board have a date problem. The 2021 prediction of no cash rate increases “until 2024 at the earliest” will haunt him for years. What receives less focus is he also has a data problem to make his job even harder.

In a rapidly-changing market, it is unacceptable that Australia’s best measure of inflation is months out of date by the time it reaches the cash rate decision-makers at 50 Martin Place. A mild inconvenience normally, stale data risks policy mistakes when inflation is advancing at the fastest pace since Howard.

Inflation watchers rely on the CPI. It tracks price changes for almost 900,000 goods and services over each quarter - say January to March. The data is then published publicly one month later. In other words, if something changes in February, policymakers find out in late April.

Australia only G20 member with quarterly CPI data

Monthly data is the norm globally. Australia is the sole G20 member - a group that includes Indonesia, Mexico and South Africa - to publish inflation quarterly.

Old-world Europe leads the pack. The European Central Bank sees how prices changed in May, on the last day of May. This, in a union of 19 countries and 750 million people.

Fresher data would make it easier to spot trends and turning points. It could help soften the nasty surprises the Reserve Bank is making a habit of delivering. April’s CPI belatedly spurred the Reserve Bank into action in May. Could higher-frequency data have caused a change of heart earlier?

Stephen Miller, an investment strategist at GSFM Funds management thinks so.

“Monthly CPI data would have alerted the RBA much earlier its transitory narrative regarding inflation was not accurate. It could have responded earlier and rectified the course it was on. I have no doubt whatsoever.”

None of this is particularly controversial. The Reserve Bank has been asking for monthly inflation data since at least 2010. In a 2017 speech, then Deputy Governor Guy Debelle said it would help “identify changes in the trend in inflation sooner”. The Reserve Bank declined to comment on this story.

The potential move to monthly reporting has been mooted for over a decade. The Australian Bureau of Statistics (ABS) first rejected the idea back in 2010 due to cost. By mid-2018 it had changed its mind. New technology had slashed data collection costs and the agency “committed to development work”. It expected to take one year.

Fast forward almost four years to March 2022 and the ABS announced it was “examining the feasibility of a monthly CPI”. An information paper outlining work-to-date and methodology is due in August 2022. Given a year of test data is required to verify and baseline the new series, we could be years away from policymakers getting access. Asked by Morningstar about the three-year delay, the ABS blamed the pandemic.

But given the ABS’ own schedule had development finished by mid-2019, months before the pandemic, one can’t help but wonder if the work simply fell off the agenda.

Budget cuts may be partly to blame. Outgoing ABS chief David Kalisch warned in 2019 that a 30% fall in operational funding over the previous decade had put essential statistics at risk. The agency noted in 2018 that more funding would be needed to cover the ongoing costs of maintaining a monthly CPI.

And there are those who argue the ABS should prioritise other issues. Chief economist at AMP Shane Oliver would like to see the ABS narrow the hefty lags between when data is collected and reported: it takes a month for the CPI, six weeks for wages and two months for Gross Domestic Product. Other developed countries manage it in half the time or less. More funding for the ABS sounds like a good place to start.

Monthly inflation data won’t make Philip Lowe omniscient, nor will it eliminate policy mistakes. Rapid-fire data is noisy and prone to misleading fluctuations. Helpful but no “panacea” says David Plank, Head of Australian Economics at ANZ.

The time to change was a decade ago

But when every change in the cash rate influences billions of dollars of investments and thousands of jobs, we should equip our policy makers with the best tools available. The ones they’ve been asking for since 2010.

The ABS estimated then the shift would cost $15 million annually. Web scraping and card scanner data mean collection costs are likely a fraction of that today. A few million dollars is a pittance to pay for the chance to improve monetary policy decision-making, even if only a little.

 

Graham Hand is Editor-At-Large at Firstlinks. Lewis Jackson is a reporter/data journalist at Morningstar, owner of Firstlinks. This article is general information and does not consider the circumstances of any investor. This article was originally published in Morningstar on 2 March 2022.

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