The Reserve Bank faces a date and data dilemma


Interest rate decisions and inflation data are currently affecting financial markets in profound ways, after a decade of much less relevance. It is therefore surprising that, although the Reserve Bank Board of Australia meets every month except January, consumer price index (CPI) data is only available quarterly. Even more mysterious, the United States’ Federal Open Markets Committee (FOMC) is not meeting for two months despite the market clinging to every word spoken by its chairman.

The Reserve Bank changed rates only once (in November 2020 by 0.15%) for more than 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 dramatic turnaround from Awaiting No Change in 2022, 2023 and into 2024, Philip Lowe has made four consecutive increases with more to come.

Reserve Bank Target Cash Rates

The most powerful central bank in the world is the US Federal Reserve, and its FOMC holds only eight scheduled meetings a year. At its last meeting, the Fed Funds hike was 0.75%, perhaps needed to “get a head start” on inflation due to the long wait for the next meeting. At least the Reserve Bank can be more responsive to market and economic conditions with some flexibility. So, following the last increase from 0.5% to 1.85% at its August 2022 meeting, he said:

“Inflation is expected to peak later this year and then ease back to the 2–3 percentage range… The Council expects to take further steps in the process of normalizing monetary conditions in the coming months, but it is not on a predefined path. The magnitude and timing of future interest rate increases will be guided by incoming data and the Board’s assessment of the outlook for inflation and the labor market.”

The phrase “not on a predefined path” was well received and the stock market and the bond market recovered.

Morningstar’s Lewis Jackson recently reviewed the Reserve Bank’s data source calendar.

What about the Reserve Bank’s CPI data?

The Reserve Bank is running an overheated economy and its most important crystal ball has passed its expiration date.

It’s bad enough that Governor Philip Lowe and the board have a dating problem. The 2021 forecast of no increase in cash rates »until 2024 at the earliestwill haunt him for years. What gets less attention is that he also has a data problem to make his job even more difficult.

In a rapidly changing market, it is unacceptable that Australia’s best measure of inflation is months past by the time it reaches cash rate makers at 50 Martin Place. A slight downside normally, outdated data risks policy errors when inflation advances at the fastest pace since Howard.

Inflation watchers rely on the CPI. It tracks the price changes of almost 900,000 goods and services during each quarter, say January to March. The data is then released publicly a month later. In other words, if something changes in February, decision makers find out at the end of April.

Australia is the only G20 member with quarterly CPI data

Monthly data is the standard worldwide. Australia is the Unique Member of the G20 – a group that includes Indonesia, Mexico and South Africa – to release inflation quarterly.

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

More recent data would make it easier to spot trends and turning points. This could help mitigate the nasty surprises the Reserve Bank is used to delivering. The April CPI belatedly prompted the Reserve Bank to act in May. Could high-frequency data have caused a change of heart sooner?

Stephen Miller, investment strategist at GSFM Funds Management, thinks so.

“The monthly CPI data would have alerted the RBA much sooner that its transitional inflation narrative was not accurate. It could have reacted sooner and corrected the course it was on. I have no doubt.

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

The potential move to monthly reporting has been mooted for over a decade. The Australian Bureau of Statistics (ABS) initially rejected the idea in 2010 due to cost. By mid-2018, he had changed his mind. The new technology had reduced data collection costs and the agency”engaged in development work”. It should take a year.

Fast forward nearly four years to March 2022 and ABS announced that it was “examine the feasibility of a monthly CPI”. A background paper outlining the work to date and methodology is expected in August 2022. Given that a year of test data is needed to verify and benchmark the new series, we could be years away from policy makers gain access. Asked by Morningstar about the three-year postponement, the ABS blamed the pandemic.

But given that ABS’ own schedule was finished in mid-2019, months before the pandemic hit, one can’t help but wonder if the job just wasn’t on the agenda.

Budget cuts could be partly responsible. Outgoing ABS chief David Kalisch warned in 2019 that a 30% drop in operational funding over the previous decade had put critical 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 ABS should prioritize other issues. AMP Chief Economist Shane Oliver would like the ABS to reduce the significant delays between when data is collected and reported: it takes a month for the CPI, six weeks for wages and two months for the gross domestic product. Other developed countries manage it in half the time or less. More funding for ABS seems like a good starting point.

Monthly inflation data will not make Philip Lowe omniscient, nor will it eliminate policy errors. Fast data is noisy and subject to misleading fluctuations. Helpful, but not a “panacea”, says David Plank, head of Australian economics at ANZ.

The time for a change was a decade ago

But when every change in the exchange rate influences billions of dollars of investment and thousands of jobs, we need to equip our decision makers with the best tools available. Those they have been asking for since 2010.

ABS then estimated that the change would cost $15 million per year. Web scraping and card scanner data means collection costs are likely to be a fraction of today’s. A few million dollars is a pittance to pay for a chance to improve monetary policy decision-making, even a little.

Graham Hand is an editor at Firstlinks. Lewis Jackson is a data reporter/journalist at Morningstar, owner of Firstlinks. This article is general information and does not take into account the situation of an investor. This article originally appeared in Morningstar on March 2, 2022.

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