1 00:00:05,730 --> 00:00:08,460 Sean Aylmer: Welcome to the Fear & Greed business interview. I'm Sean Aylmer. 2 00:00:08,460 --> 00:00:10,709 Sean Aylmer: The challenge for the Reserve Bank got a bit trickier 3 00:00:10,710 --> 00:00:13,590 Sean Aylmer: yesterday with monthly inflation climbing for a second month in 4 00:00:13,590 --> 00:00:16,319 Sean Aylmer: a row. Economists had expected it to drop from 3. 5 00:00:16,650 --> 00:00:20,460 Sean Aylmer: 5%, that's an annual rate, to 3. 4% for the year 6 00:00:20,460 --> 00:00:23,520 Sean Aylmer: to April. Instead, it rose to 3. 6%, adding data 7 00:00:23,520 --> 00:00:26,578 Sean Aylmer: earlier this week that showed retail sales per capita are 8 00:00:26,579 --> 00:00:29,519 Sean Aylmer: at their lowest level in two years, and it's quite 9 00:00:29,520 --> 00:00:32,159 Sean Aylmer: the balancing act for the Reserve Bank getting suddenly high 10 00:00:32,159 --> 00:00:35,249 Sean Aylmer: inflation back into the target range when consumers and businesses 11 00:00:35,519 --> 00:00:38,880 Sean Aylmer: are already hurting. Cherelle Murphy is the Chief Economist at EY. 12 00:00:39,420 --> 00:00:40,950 Sean Aylmer: Cherelle welcome back to Fear & Greed. 13 00:00:41,340 --> 00:00:42,990 Cherelle Murphy: Thank you, Sean. It's lovely to be here. 14 00:00:43,590 --> 00:00:46,409 Sean Aylmer: Let's start with yesterday's numbers. Were you surprised that it 15 00:00:46,409 --> 00:00:48,750 Sean Aylmer: came in where it did and why did it come 16 00:00:48,750 --> 00:00:49,619 Sean Aylmer: in where it did? 17 00:00:50,309 --> 00:00:53,849 Cherelle Murphy: Well, yeah, it was a little stronger than expected, but 18 00:00:54,270 --> 00:00:57,000 Cherelle Murphy: the market, but we've been warning, as you know, that 19 00:00:57,000 --> 00:00:58,920 Cherelle Murphy: for some time that we're a little concerned about the 20 00:00:58,920 --> 00:01:03,239 Cherelle Murphy: inflationary pressure being on the upside. But look, there's a 21 00:01:03,240 --> 00:01:06,750 Cherelle Murphy: lot in there. This is the April number, so it's 22 00:01:06,750 --> 00:01:10,830 Cherelle Murphy: one of the monthly numbers. It is not a comprehensive 23 00:01:10,830 --> 00:01:14,520 Cherelle Murphy: picture of the CPI. It's about 40% of it, which 24 00:01:14,520 --> 00:01:19,740 Cherelle Murphy: has held unchanged, so they're only measuring effectively 60%. I 25 00:01:19,740 --> 00:01:22,860 Cherelle Murphy: guess though the components that went up a lot didn't 26 00:01:22,860 --> 00:01:28,589 Cherelle Murphy: surprise us. Essentials, like housing, food and transport, these were 27 00:01:28,709 --> 00:01:32,250 Cherelle Murphy: where there was a lot of upward pressure. We know, 28 00:01:32,340 --> 00:01:35,729 Cherelle Murphy: in April, that of course the health insurance premiums go 29 00:01:35,730 --> 00:01:38,220 Cherelle Murphy: up, so that was in there too. That pushed up 30 00:01:38,220 --> 00:01:42,119 Cherelle Murphy: health costs. There was a lot that we certainly, yes, 31 00:01:42,120 --> 00:01:45,420 Cherelle Murphy: we did expect, but I think probably more concerning was 32 00:01:45,420 --> 00:01:50,310 Cherelle Murphy: that increase in the trimmed mean that rose up from 33 00:01:50,310 --> 00:01:54,059 Cherelle Murphy: 4% in the year to March to 4. 1%. That 34 00:01:54,059 --> 00:01:57,209 Cherelle Murphy: is, I guess, the measure that grabs the core of 35 00:01:57,210 --> 00:02:01,139 Cherelle Murphy: inflation. As I say though, this is a monthly number, 36 00:02:01,139 --> 00:02:02,639 Cherelle Murphy: so we do have to be a little bit careful 37 00:02:02,639 --> 00:02:03,419 Cherelle Murphy: about how we read that. 38 00:02:03,990 --> 00:02:08,430 Sean Aylmer: Okay. Where do we stand on inflation then? We don't 39 00:02:08,430 --> 00:02:10,500 Sean Aylmer: have a... Well, we a Reserve Bank meeting next month, 40 00:02:10,500 --> 00:02:14,910 Sean Aylmer: I think. But where do we stand on inflation after 41 00:02:14,910 --> 00:02:19,019 Sean Aylmer: yesterday's number? Is the trajectory still going in the right 42 00:02:19,020 --> 00:02:21,480 Sean Aylmer: direction or have we flattened out? 43 00:02:22,049 --> 00:02:25,050 Cherelle Murphy: Yeah, I think at best it's flattened out and potentially 44 00:02:25,050 --> 00:02:30,780 Cherelle Murphy: it's gotten a little worse. We can see that, as 45 00:02:30,780 --> 00:02:33,630 Cherelle Murphy: I was mentioning, those core measures of inflation are not 46 00:02:33,630 --> 00:02:37,410 Cherelle Murphy: coming down as fast as the headline measures, and in 47 00:02:37,410 --> 00:02:40,559 Cherelle Murphy: fact, in some of the recent indicators, that slight tick 48 00:02:40,559 --> 00:02:43,620 Cherelle Murphy: up. Now, that may be nothing, and it's probably a 49 00:02:43,620 --> 00:02:47,370 Cherelle Murphy: bit early to tell whether that tick up is significant 50 00:02:47,370 --> 00:02:50,639 Cherelle Murphy: and will hold onto it, but you'd have to say 51 00:02:50,639 --> 00:02:53,429 Cherelle Murphy: that it's not really going the Reserve Bank's way at 52 00:02:53,429 --> 00:02:56,819 Cherelle Murphy: the moment. It's just at the margin going the wrong 53 00:02:56,820 --> 00:03:00,600 Cherelle Murphy: way. Now, they, of course, expect inflation to come back 54 00:03:00,600 --> 00:03:03,990 Cherelle Murphy: into the target band by the end of 2025, and 55 00:03:04,020 --> 00:03:07,950 Cherelle Murphy: they've got a fairly low tolerance for things going wrong, 56 00:03:08,370 --> 00:03:11,130 Cherelle Murphy: and so I do feel like this might concern them 57 00:03:11,130 --> 00:03:11,790 Cherelle Murphy: a little bit, yeah. 58 00:03:12,508 --> 00:03:16,079 Sean Aylmer: Okay. Didn't we have something similar at the fed in 59 00:03:16,079 --> 00:03:19,710 Sean Aylmer: the US a few months ago where things actually just 60 00:03:19,710 --> 00:03:21,810 Sean Aylmer: looked like they were going a little bit the wrong 61 00:03:21,810 --> 00:03:23,669 Sean Aylmer: way at the margins, but then the next number came 62 00:03:23,669 --> 00:03:25,889 Sean Aylmer: in and it seems to have self- corrected almost? 63 00:03:26,040 --> 00:03:28,709 Cherelle Murphy: That's right. That's right. That's why we've got to be 64 00:03:28,710 --> 00:03:34,920 Cherelle Murphy: really careful about extrapolating one number into a future trend, 65 00:03:34,949 --> 00:03:40,200 Cherelle Murphy: because we really don't know. But on the basis that 66 00:03:40,260 --> 00:03:44,460 Cherelle Murphy: we've still got a strong labor market, the housing market, 67 00:03:44,460 --> 00:03:48,179 Cherelle Murphy: as you know, is throwing up pretty bad numbers in 68 00:03:48,179 --> 00:03:51,719 Cherelle Murphy: terms of inflation. There's a lot of activity happening in 69 00:03:51,719 --> 00:03:54,720 Cherelle Murphy: the housing market. Now, of course, the price of houses 70 00:03:54,720 --> 00:03:56,580 Cherelle Murphy: is not in the CPI, but I think it is 71 00:03:56,850 --> 00:04:01,320 Cherelle Murphy: representative of an economy to some extent that's running quite 72 00:04:01,320 --> 00:04:05,490 Cherelle Murphy: strong and where demand pressure is quite high. Then you 73 00:04:05,490 --> 00:04:08,699 Cherelle Murphy: put that together with some of the international forces that 74 00:04:08,700 --> 00:04:11,699 Cherelle Murphy: might be pushing a little bit of upward pressure on 75 00:04:11,699 --> 00:04:16,770 Cherelle Murphy: prices. Petrol prices, as we know, are incredibly volatile. Then we've 76 00:04:16,770 --> 00:04:19,860 Cherelle Murphy: got the impact of all the cost of living measures, 77 00:04:19,860 --> 00:04:22,409 Cherelle Murphy: which are going to flow into the numbers over the 78 00:04:22,410 --> 00:04:26,070 Cherelle Murphy: next little while, and I do think we should continue 79 00:04:26,070 --> 00:04:27,599 Cherelle Murphy: to be concerned about inflation. 80 00:04:28,199 --> 00:04:30,299 Sean Aylmer: Stay with me, Cherelle. We'll be back in a minute. 81 00:04:37,080 --> 00:04:40,349 Sean Aylmer: My guest this morning is EY Chief Economist, Cherelle Murphy. 82 00:04:42,210 --> 00:04:44,729 Sean Aylmer: Let's bring the consumer into this discussion. We saw the 83 00:04:44,730 --> 00:04:47,368 Sean Aylmer: retail sales figures earlier in the week. Sales are up, 84 00:04:47,369 --> 00:04:49,920 Sean Aylmer: I think was 1. 3% for the year at the 85 00:04:49,920 --> 00:04:52,230 Sean Aylmer: end of the month, I think. Consumers are struggling out 86 00:04:52,230 --> 00:04:55,170 Sean Aylmer: there. At what point does the Reserve Bank say, " Okay, 87 00:04:55,740 --> 00:04:58,799 Sean Aylmer: we know that to help consumers longterm, we need to 88 00:04:58,800 --> 00:05:01,410 Sean Aylmer: get inflation into the target range?" Michelle Bullock has made 89 00:05:01,410 --> 00:05:04,139 Sean Aylmer: that very clear. But that's kind of like a medium 90 00:05:04,139 --> 00:05:06,899 Sean Aylmer: term answer here. We've got some real short- term problems. 91 00:05:06,900 --> 00:05:10,380 Sean Aylmer: People literally living in cars because they can't afford housing. 92 00:05:10,830 --> 00:05:12,719 Sean Aylmer: How does the Reserve Bank balance that? 93 00:05:14,070 --> 00:05:18,059 Cherelle Murphy: It's really hard. Essentially, it can't. It can't do anything 94 00:05:18,059 --> 00:05:21,450 Cherelle Murphy: about it. It's really up to both the commonwealth and 95 00:05:21,450 --> 00:05:24,990 Cherelle Murphy: the state governments to manage this and to help get 96 00:05:24,990 --> 00:05:27,930 Cherelle Murphy: through this difficult period. Of course, that's what the cost 97 00:05:27,930 --> 00:05:30,419 Cherelle Murphy: of living measures that have been delivered in the federal 98 00:05:30,420 --> 00:05:34,888 Cherelle Murphy: budget, the form of the energy bill relief and some 99 00:05:34,889 --> 00:05:37,380 Cherelle Murphy: of those other little measures that they had in there, 100 00:05:37,920 --> 00:05:41,729 Cherelle Murphy: trying to reduce HECS debt or give small payments to 101 00:05:41,730 --> 00:05:46,529 Cherelle Murphy: those students on pracs. These are the kind of measures 102 00:05:46,529 --> 00:05:49,500 Cherelle Murphy: that they're trying to use to help people through without 103 00:05:49,500 --> 00:05:52,920 Cherelle Murphy: creating too much inflation along the way. But what can 104 00:05:52,920 --> 00:05:55,259 Cherelle Murphy: the Reserve Bank do about it? Really nothing. It's just 105 00:05:55,259 --> 00:05:58,318 Cherelle Murphy: got to kind of grind away, make sure that we 106 00:05:58,320 --> 00:06:01,289 Cherelle Murphy: all continue to believe that inflation will get to two 107 00:06:01,290 --> 00:06:03,570 Cherelle Murphy: and a half percent and it will roughly stay there 108 00:06:03,570 --> 00:06:06,330 Cherelle Murphy: over the long term, and that's the best thing they 109 00:06:06,330 --> 00:06:10,349 Cherelle Murphy: can do to manage the way people behave to minimize 110 00:06:10,349 --> 00:06:11,399 Cherelle Murphy: inflationary risk. 111 00:06:12,178 --> 00:06:14,219 Sean Aylmer: Far be it for me to tell a former Reserve 112 00:06:14,219 --> 00:06:17,219 Sean Aylmer: Bank economist now Chief Economist at EY what to think. 113 00:06:17,279 --> 00:06:19,979 Sean Aylmer: However, Cherelle, I have a solution for Michelle Bullock and 114 00:06:19,980 --> 00:06:24,000 Sean Aylmer: friends. Is it not possible for them to actually cut 115 00:06:24,000 --> 00:06:28,860 Sean Aylmer: rates slower, so spend two years cutting rates and do 116 00:06:28,860 --> 00:06:33,029 Sean Aylmer: it very slowly so that any relief will come? It 117 00:06:33,029 --> 00:06:35,730 Sean Aylmer: may mean that it takes a while longer for inflation 118 00:06:36,059 --> 00:06:38,370 Sean Aylmer: to get back into that target range, but at least 119 00:06:38,460 --> 00:06:42,000 Sean Aylmer: there is some relief as opposed to the trajectory now 120 00:06:42,000 --> 00:06:45,299 Sean Aylmer: where the potential for putting the consumer into a tailspin 121 00:06:45,330 --> 00:06:48,299 Sean Aylmer: is real and suddenly you have to cut rates quickly. 122 00:06:48,570 --> 00:06:50,609 Sean Aylmer: So kind of having a halfway point. Or is that 123 00:06:50,610 --> 00:06:52,830 Sean Aylmer: just wishful thinking? 124 00:06:53,400 --> 00:07:00,660 Cherelle Murphy: Well, I think the cautious approach is probably welcome, but the reality 125 00:07:00,660 --> 00:07:04,498 Cherelle Murphy: of the inflation problem is that the longer that inflation 126 00:07:04,500 --> 00:07:07,469 Cherelle Murphy: stays outside the two to three percent band, the harder 127 00:07:07,469 --> 00:07:10,889 Cherelle Murphy: it is for the Reserve Bank to control it. As 128 00:07:10,889 --> 00:07:15,420 Cherelle Murphy: I said, people's behavior would start to change to expect 129 00:07:15,420 --> 00:07:18,330 Cherelle Murphy: higher inflation. So businesses, for example, might put their prices 130 00:07:18,330 --> 00:07:21,780 Cherelle Murphy: up three percent instead of two percent. Workers, when they 131 00:07:21,780 --> 00:07:25,049 Cherelle Murphy: are negotiating wages, would say, " To keep up with the 132 00:07:25,049 --> 00:07:27,719 Cherelle Murphy: cost of living, I need a four percent pay rise 133 00:07:27,719 --> 00:07:31,350 Cherelle Murphy: instead of a two percent pay rise." That therefore begets 134 00:07:31,350 --> 00:07:36,480 Cherelle Murphy: more inflation. For the RBA, at least until they're at 135 00:07:36,480 --> 00:07:38,700 Cherelle Murphy: the point where inflation is back in the band, they've 136 00:07:39,030 --> 00:07:43,650 Cherelle Murphy: really got to be very, very focused, because that credibility 137 00:07:43,650 --> 00:07:44,819 Cherelle Murphy: is everything to them. 138 00:07:45,179 --> 00:07:49,019 Sean Aylmer: Ah, the dismal scientist. Tell me, interest rates then, it 139 00:07:49,260 --> 00:07:52,080 Sean Aylmer: doesn't look like from listening to you then it doesn't 140 00:07:52,080 --> 00:07:54,570 Sean Aylmer: look like the Reserve Bank's going to do anything too 141 00:07:54,570 --> 00:07:55,500 Sean Aylmer: much too soon. 142 00:07:56,639 --> 00:07:59,219 Cherelle Murphy: I don't think so. I've kind of thought that really since 143 00:07:59,219 --> 00:08:02,460 Cherelle Murphy: the end of last year, that it's just too soon 144 00:08:02,460 --> 00:08:05,850 Cherelle Murphy: for the Reserve Bank to risk letting go of its 145 00:08:06,240 --> 00:08:11,310 Cherelle Murphy: inflation ambitions here. There's just too many risks that things 146 00:08:11,310 --> 00:08:15,390 Cherelle Murphy: would get away from it. The policy of least regret, 147 00:08:15,420 --> 00:08:17,099 Cherelle Murphy: which I think is always a good way to think 148 00:08:17,099 --> 00:08:20,879 Cherelle Murphy: about central banking, is to just hang on to rates 149 00:08:20,880 --> 00:08:23,910 Cherelle Murphy: where they are for a while. Obviously, if we do 150 00:08:23,910 --> 00:08:26,820 Cherelle Murphy: get some upside surprises on inflation, they can then go 151 00:08:26,970 --> 00:08:30,270 Cherelle Murphy: up, actually take the cash rate up. But equally, if 152 00:08:30,270 --> 00:08:34,500 Cherelle Murphy: they go too soon on the downside and inflation races 153 00:08:34,500 --> 00:08:36,509 Cherelle Murphy: away again, it's going to be much harder to pull 154 00:08:36,509 --> 00:08:39,090 Cherelle Murphy: down a second time around if they make a mistake. 155 00:08:40,799 --> 00:08:44,250 Sean Aylmer: The next big data point, I mean, everything's a big 156 00:08:44,250 --> 00:08:48,840 Sean Aylmer: data point, but the June quarter inflation isn't out until 157 00:08:48,840 --> 00:08:49,741 Sean Aylmer: the end of July. Am I right in that? 158 00:08:49,741 --> 00:08:52,110 Cherelle Murphy: Yeah, that's right. It's a long time away. 159 00:08:52,380 --> 00:08:54,958 Sean Aylmer: But do you think the Reserve Bank would move in 160 00:08:54,960 --> 00:08:57,630 Sean Aylmer: any direction ahead of the quarterly number? 161 00:08:58,320 --> 00:09:00,780 Cherelle Murphy: I don't think so. I don't think that there's enough 162 00:09:00,780 --> 00:09:04,380 Cherelle Murphy: of a signal either way, to be honest, to move 163 00:09:04,770 --> 00:09:09,719 Cherelle Murphy: before then. No. Unless there was some incredible shock. But 164 00:09:09,719 --> 00:09:12,509 Cherelle Murphy: even then, it would probably be a short- term factor, 165 00:09:12,509 --> 00:09:15,990 Cherelle Murphy: which they would be unlikely to respond to unless it 166 00:09:15,990 --> 00:09:20,640 Cherelle Murphy: was something as big as COVID or the GFC. It's 167 00:09:20,640 --> 00:09:24,900 Cherelle Murphy: likely that they're going to sit back, I think, and just continue to watch 168 00:09:24,900 --> 00:09:26,309 Cherelle Murphy: that data for a little while. Yeah. 169 00:09:26,849 --> 00:09:28,710 Sean Aylmer: Cherelle, thank you for talking to Fear & Greed. 170 00:09:29,219 --> 00:09:30,059 Cherelle Murphy: My pleasure, Sean. 171 00:09:30,900 --> 00:09:33,630 Sean Aylmer: That is EY Chief Economist, Cherelle Murphy. This is the 172 00:09:33,630 --> 00:09:35,910 Sean Aylmer: Fear & Greed business interview. Join us every morning for the 173 00:09:35,910 --> 00:09:39,000 Sean Aylmer: full episode of Fear & Greed, daily business news for people 174 00:09:39,000 --> 00:09:41,880 Sean Aylmer: who make their own decisions. I'm Sean Aylmer. Enjoy your day.