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Speaker 1: Welcome to the Fear and Greed Summer series, brought to

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Speaker 1: you by Westpac. I'm Sean Aylmer. At one point during

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Speaker 1: twenty twenty five, the reserve banks suggested that inflation had

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Speaker 1: been slade, but a last it wasn't the case. As

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Speaker 1: we head into a new year, inflation remains public enemy

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Speaker 1: number one for economists. My guest today is Westpac chief

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Speaker 1: economist Lucy Ellis. Lucy, welcome back to Fear and Greed.

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Speaker 2: Thanks Sean. Great to be here.

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Speaker 1: So it wasn't slaid after all? Is it ever slayed?

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Speaker 2: Well, you can never assume that inflation has completely gone away.

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Speaker 2: We'll always have a positive rate of inflation because we

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Speaker 2: have a positive inflation target. The question is is it

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Speaker 2: an uncomfortable level? And the September quarter number and the

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Speaker 2: October month number were a bit higher than people expected.

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Speaker 2: And I think the real question is how much of

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Speaker 2: that is an ongoing signal and how much of that

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Speaker 2: was just noise a bump in the road.

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Speaker 1: Okay, so let's go into that. Well, first, are we

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Speaker 1: surprised by those numbers? September quarter, October?

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Speaker 2: The September quarter number was higher than we expected. The

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Speaker 2: October number was in line with our expectations on a

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Speaker 2: headline level, but it was above the market. We were

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Speaker 2: a bit above market on our expectations, so it was

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Speaker 2: less of a surprise to us. But there are some

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Speaker 2: things in there that you start to wonder, could this

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Speaker 2: keep going on? Where reasonably confident that inflation will come

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Speaker 2: back down if things play out as we expect, but

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Speaker 2: there's definitely a world in which inflation stays a bit

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Speaker 2: higher than desired.

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Speaker 1: Okay, so these temporary versus permanent factors just explain some

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Speaker 1: of them.

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Speaker 2: Well, there's a number of areas where you just kind

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Speaker 2: of know that they're sort of no noisy things like travel.

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Speaker 2: If you look at all of the components of the

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Speaker 2: one hundred and thirty components in the CPI and you

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Speaker 2: look at the ones that had inflation at five percent

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Speaker 2: or above in the year to October, there's a whole

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Speaker 2: range of things like electricity. We knew about that. That's

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Speaker 2: the roll off of theate the rebates, and therefore it's

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Speaker 2: not going to continue at that rate, but it's going

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Speaker 2: to be high. But there are things like water changes

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Speaker 2: where there was a big increase in water prices in

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Speaker 2: Sydney that was a regulated price that went up thirteen

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Speaker 2: percent in Sydney in the month of October, and we're

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Speaker 2: going to see seven eight percent increases every July for

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Speaker 2: the next few years because of what the regulators decided.

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Speaker 2: So there's all these regulated or administered prices like postal chargers,

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Speaker 2: like council rates, like water, like electricity that are actually

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Speaker 2: running hotter than the rest of the the market sector

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Speaker 2: prices things like personal services or you know, your restaurant

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Speaker 2: meals and so forth.

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Speaker 1: Should we be worried about that? Because I always thought

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Speaker 1: when they're regulated prices, that you can regulate them the

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Speaker 1: other way if you need be, if you have a

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Speaker 1: government that wants to do that, right, But when market

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Speaker 1: forces are actually not pushing infation higher, is there any

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Speaker 1: good in that at all?

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Speaker 2: Well, I think this is the real dilemma is how

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Speaker 2: much of this is going to then get built into

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Speaker 2: the cost base of other businesses. And again, we think

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Speaker 2: that will fade. You know, it will fade. I mean,

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Speaker 2: our own forecast show inflation coming down through twenty twenty

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Speaker 2: six it at a reasonably good clip. But you know,

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Speaker 2: there is just this issue that if governments are so

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Speaker 2: concerned about their bottom lines and government instrumentalities are so

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Speaker 2: concerned about their bottom lines that they're building in their

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Speaker 2: increasing costs into what they're passing on to everybody else,

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Speaker 2: that that gen can be passed on to people's cost bases.

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Speaker 2: So there is a little bit of a sense in

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Speaker 2: which it could result in ongoing inflation. But you're right,

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Speaker 2: this is not telling you that demand is strong, you know,

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Speaker 2: and outstripping supply and therefore the RBA must hike It's

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Speaker 2: a little bit more subtle than that.

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Speaker 1: Okay, so must hike rates? Why do you reckon on

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Speaker 1: happen to interest rates?

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Speaker 2: Well, as you might have seen, we recently changed our

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Speaker 2: call the week after the RBA board meeting. It's become

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Speaker 2: apparent that the RBA is worried about the potential for

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Speaker 2: ongoing inflation, even though some of this does look like

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Speaker 2: administered prices and noise. And so while our view of

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Speaker 2: the economy hasn't changed, our view of how the RBA's

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Speaker 2: going to respond has changed. So we previously thought that

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Speaker 2: they might have it a possibility to cut rates next year,

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Speaker 2: but we've now pushed that right out. So we're now

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Speaker 2: expecting rates to be constant at three point six percent,

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Speaker 2: right through twenty twenty six. Possibility they can cut in

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Speaker 2: twenty twenty seven if things play out as we expect. However,

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Speaker 2: if we're wrong and inflation does remain strong and continues

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Speaker 2: to surprise on the upside in the next couple of months,

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Speaker 2: well then the governor has made it quite clear that

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Speaker 2: they're standing ready to hike rate. So there is definitely

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Speaker 2: a chance that they hike rates as early as February,

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Speaker 2: but only if inflation runs a bit stronger than what

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Speaker 2: we are expecting.

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Speaker 1: Lucy, thank you for talking to Fear and Greed Summer Series.

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Speaker 2: Thank you very much.

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Speaker 1: That was Westake chief Economist Lucy Ellis. Don't forget to

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Speaker 1: hit follow on the podcast. I'm Seanielmer and this is

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Speaker 1: a Fear and Greed Summer series brought to you by

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Speaker 1: west Pay