1 00:00:03,730 --> 00:00:06,140 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,140 --> 00:00:10,090 Sean Aylmer: Aylmer. Inflation has surged in the March quarter, putting a 3 00:00:10,090 --> 00:00:12,300 Sean Aylmer: whole lot of pressure on the Reserve Bank ahead of 4 00:00:12,300 --> 00:00:15,490 Sean Aylmer: its monthly board meeting next week. Headline inflation came in 5 00:00:15,490 --> 00:00:19,720 Sean Aylmer: yesterday at 5. 1%, its highest annual rate in more 6 00:00:19,720 --> 00:00:23,770 Sean Aylmer: than two decades, and underlying inflation, the RBA's preferred measure, 7 00:00:24,070 --> 00:00:27,610 Sean Aylmer: rose to 3. 7%, will be on the central bank's target 8 00:00:27,610 --> 00:00:31,670 Sean Aylmer: of 2 to 3%. AMP senior economist Diana Mousina is my 9 00:00:31,670 --> 00:00:34,590 Sean Aylmer: guest this morning. You can also catch Diana moderating a 10 00:00:34,590 --> 00:00:37,860 Sean Aylmer: panel today and tomorrow, in fact, at the Accounting Business 11 00:00:37,860 --> 00:00:40,830 Sean Aylmer: Expo in Sydney. Fear and Greed is a partner of 12 00:00:40,830 --> 00:00:43,330 Sean Aylmer: the expo. Diana, welcome back to Fear and Greed. 13 00:00:43,740 --> 00:00:44,940 Diana Mousina : Thank you so much for having me. 14 00:00:45,330 --> 00:00:48,830 Sean Aylmer: So what do you make of the inflation figures yesterday, higher 15 00:00:48,830 --> 00:00:49,810 Sean Aylmer: than you thought or not? 16 00:00:50,280 --> 00:00:52,650 Diana Mousina : It was an upside surprise. I mean, we had already 17 00:00:52,650 --> 00:00:57,010 Diana Mousina : been looking for a pretty elevated quarterly inflation print. We 18 00:00:57,010 --> 00:01:01,130 Diana Mousina : were expecting actually the same as consensus so 1. 7% for 19 00:01:01,130 --> 00:01:05,110 Diana Mousina : the headline over the quarter, and 1. 2 over the quarter. 20 00:01:05,670 --> 00:01:09,600 Diana Mousina : The data was stronger on both measures and the focus 21 00:01:09,600 --> 00:01:12,600 Diana Mousina : is really on the trimmed mean, which is the RBA's 22 00:01:12,690 --> 00:01:16,310 Diana Mousina : measure or preferred measure of core inflation, which is running 23 00:01:16,310 --> 00:01:20,890 Diana Mousina : at 1. 4% over the quarter and 3. 7% over the 24 00:01:20,890 --> 00:01:23,160 Diana Mousina : year and, of course, if you annualized that number, you 25 00:01:23,160 --> 00:01:28,110 Diana Mousina : get a much stronger outcome close to 6%. So the 26 00:01:28,110 --> 00:01:30,620 Diana Mousina : concern here is that while there are a lot of 27 00:01:30,620 --> 00:01:34,610 Diana Mousina : temporary factors that are working to push inflation higher, there 28 00:01:34,610 --> 00:01:37,729 Diana Mousina : is no sense of how long these temporary factors will 29 00:01:37,730 --> 00:01:40,610 Diana Mousina : be around for. I mean, some of these supply chain 30 00:01:40,610 --> 00:01:43,709 Diana Mousina : pressures could still be pushing inflation higher in the next 31 00:01:43,970 --> 00:01:47,810 Diana Mousina : six, 12 months. The flood impacts and the impacts on 32 00:01:47,810 --> 00:01:50,820 Diana Mousina : supply from the flood could still mean higher fresh food 33 00:01:50,820 --> 00:01:53,100 Diana Mousina : prices for a number of months, and this is a 34 00:01:53,100 --> 00:01:57,400 Diana Mousina : negative for consumers. It decreases consumer purchasing and power and 35 00:01:57,400 --> 00:01:59,670 Diana Mousina : for businesses as well, so the RBA needs to get on 36 00:01:59,670 --> 00:02:01,440 Diana Mousina : top of these high inflation prints. 37 00:02:01,750 --> 00:02:04,930 Sean Aylmer: Okay. So just what were some of the reasons for it? You 38 00:02:04,930 --> 00:02:08,190 Sean Aylmer: mentioned the floods pushing up food prices and I think beef prices, 39 00:02:08,690 --> 00:02:12,070 Sean Aylmer: but there are also other things like, obviously, fuel, which is not part of 40 00:02:12,070 --> 00:02:15,649 Sean Aylmer: the underlying measure, but dwelling as well. What else was there? 41 00:02:16,130 --> 00:02:18,639 Diana Mousina : There's a few things going on. There's a lot of 42 00:02:18,639 --> 00:02:21,980 Diana Mousina : global supply side disruptions, which we've spoken about before that's 43 00:02:21,980 --> 00:02:26,669 Diana Mousina : related to high goods demand from consumers, transport issues causing higher 44 00:02:26,970 --> 00:02:32,320 Diana Mousina : transport costs and storage costs, high commodity prices, which started 45 00:02:32,320 --> 00:02:36,690 Diana Mousina : before Russia- Ukraine war broke out. The prices for food, 46 00:02:36,690 --> 00:02:39,350 Diana Mousina : for example, was already at a multi- year high, but 47 00:02:39,350 --> 00:02:42,040 Diana Mousina : the war has exacerbated some of these commodity price impacts. 48 00:02:42,040 --> 00:02:45,100 Diana Mousina : So commodity prices are rising, commodity price are, obviously, an 49 00:02:45,130 --> 00:02:48,440 Diana Mousina : input factor to many different parts of the supply chain 50 00:02:48,440 --> 00:02:53,070 Diana Mousina : process and especially in food and that's leading to higher prices 51 00:02:53,070 --> 00:02:57,389 Diana Mousina : across the board as well. Just some notable increases in 52 00:02:57,389 --> 00:03:01,040 Diana Mousina : the quarterly inflation data, higher prices for fuel, petrol up 53 00:03:01,040 --> 00:03:06,310 Diana Mousina : by 11%, higher prices for food up by about 2. 8%, 54 00:03:06,610 --> 00:03:10,700 Diana Mousina : household gas and fuels up by 6.3% over the quarter. There 55 00:03:10,700 --> 00:03:15,090 Diana Mousina : are also some temporary increases in prices for things related 56 00:03:15,090 --> 00:03:19,230 Diana Mousina : to medical prices or pharmaceutical goods that's really related to changes 57 00:03:19,230 --> 00:03:22,360 Diana Mousina : in the pharmaceutical benefit scheme, which is a cyclical thing, 58 00:03:22,810 --> 00:03:27,320 Diana Mousina : and tertiary education, which is related to some government changes 59 00:03:27,320 --> 00:03:30,440 Diana Mousina : around pricing for education. I don't think that those factors 60 00:03:30,440 --> 00:03:33,560 Diana Mousina : will continue into the coming quarters. Also, as you mentioned, 61 00:03:33,639 --> 00:03:37,700 Diana Mousina : high prices for that category called dwelling purchases by owner- 62 00:03:37,700 --> 00:03:41,890 Diana Mousina : occupied, which is ultimately a guide to cost of housing 63 00:03:41,890 --> 00:03:46,020 Diana Mousina : construction. Recently that category has been quite low because the 64 00:03:46,020 --> 00:03:48,740 Diana Mousina : government was handing out the building grant, and now that 65 00:03:48,800 --> 00:03:53,190 Diana Mousina : that's ceased and we've seen some prices for materials for 66 00:03:53,190 --> 00:03:57,550 Diana Mousina : housing increase, that category is rising quite fast. But broadly, 67 00:03:57,550 --> 00:04:02,740 Diana Mousina : there's been a very broad rise in consumer price baskets. 68 00:04:03,030 --> 00:04:07,210 Diana Mousina : We're now seeing that about 56% of total CPI baskets 69 00:04:07,250 --> 00:04:12,720 Diana Mousina : have annual inflation above 3%. Just last quarter, it was 35%. 70 00:04:13,720 --> 00:04:17,669 Sean Aylmer: Wow. Okay. So for many, many months, you've been forecasting 71 00:04:17,670 --> 00:04:21,230 Sean Aylmer: a rate rise sort of about now, or in the next 72 00:04:21,230 --> 00:04:24,170 Sean Aylmer: couple of months at least, and the consensus has come 73 00:04:24,360 --> 00:04:27,050 Sean Aylmer: to you on that. You seem to be proven right. 74 00:04:27,080 --> 00:04:29,930 Sean Aylmer: What chance that the Reserve Bank will lift rates in 75 00:04:29,930 --> 00:04:30,359 Sean Aylmer: a week's time? 76 00:04:30,360 --> 00:04:33,279 Diana Mousina : Well, we think that we will get a rate rise next 77 00:04:33,570 --> 00:04:35,850 Diana Mousina : week now, and we think the rate rise will be 78 00:04:35,850 --> 00:04:39,339 Diana Mousina : 40 basis points so that the cash rate will move from 0.1 to 0. 79 00:04:39,339 --> 00:04:43,510 Diana Mousina : 5% next week when the RBA meets before the election. 80 00:04:43,860 --> 00:04:46,260 Diana Mousina : That will get another rate rise in June and that 81 00:04:46,260 --> 00:04:47,679 Diana Mousina : the cash rate will end the year at one and 82 00:04:47,700 --> 00:04:51,870 Diana Mousina : half percent. That sounds quite aggressive compared to the median 83 00:04:51,870 --> 00:04:55,260 Diana Mousina : or the consensus economist estimate, but it's not that aggressive 84 00:04:55,260 --> 00:04:58,469 Diana Mousina : compared to market pricing, which is, I mean, markets have been 85 00:04:58,470 --> 00:05:00,230 Diana Mousina : pricing in a cash rate at around two and a 86 00:05:00,230 --> 00:05:03,190 Diana Mousina : half percent in this Australia for about a month or two 87 00:05:03,190 --> 00:05:06,380 Diana Mousina : months now. But we think that the RBA will want to 88 00:05:06,380 --> 00:05:10,000 Diana Mousina : get on top of the high inflation numbers. I think 89 00:05:10,000 --> 00:05:13,409 Diana Mousina : there is some genuine reasons to believe that the Fed 90 00:05:13,710 --> 00:05:17,310 Diana Mousina : probably has made a policy mistake by not hiking rates 91 00:05:17,310 --> 00:05:20,440 Diana Mousina : sooner or by hiking rates by more earlier in the 92 00:05:20,440 --> 00:05:22,990 Diana Mousina : year, and now they'll probably need to do a few 93 00:05:23,000 --> 00:05:27,510 Diana Mousina : 50 basis point increases. Think the RBA would ultimately like 94 00:05:27,510 --> 00:05:30,529 Diana Mousina : to avoid having to raise interest rates by 50 basis 95 00:05:30,529 --> 00:05:33,430 Diana Mousina : points at a time. I don't think that the Australian 96 00:05:33,430 --> 00:05:37,620 Diana Mousina : consumer would be able to withstand a few 50 basis 97 00:05:37,620 --> 00:05:40,300 Diana Mousina : point rate hikes as much as they could in the US. 98 00:05:40,920 --> 00:05:48,630 Sean Aylmer: Stay with me, Diana. We'll be back in a minute. My 99 00:05:48,630 --> 00:05:53,610 Sean Aylmer: guest this morning is AMP senior economist, Diana Mousina. Do you think the fact 100 00:05:53,610 --> 00:05:56,180 Sean Aylmer: that the quarterly inflation rate a few times by four 101 00:05:56,180 --> 00:05:58,810 Sean Aylmer: to get an annualized inflation rate is just that much 102 00:05:58,810 --> 00:06:02,020 Sean Aylmer: higher than the annual rate, which suggests that price rises 103 00:06:02,610 --> 00:06:05,760 Sean Aylmer: are increasing speed in a sense? Do you think the 104 00:06:05,760 --> 00:06:09,859 Sean Aylmer: bank will suddenly realize that the whole mantra of keeping 105 00:06:09,860 --> 00:06:14,210 Sean Aylmer: wages growth between 2 and 3% sustainably and also prices 106 00:06:14,210 --> 00:06:17,080 Sean Aylmer: between 2 and 3% sustainably was wrong? 107 00:06:17,839 --> 00:06:22,200 Diana Mousina : Well, they've had this inflation target for many decades now, 108 00:06:22,260 --> 00:06:24,350 Diana Mousina : and so if we're questioning that, then I think we 109 00:06:24,350 --> 00:06:28,020 Diana Mousina : need to question, well, does the inflation target of 2 110 00:06:28,020 --> 00:06:32,560 Diana Mousina : to 3% make sense, and is it sustainable? I think ultimately, 111 00:06:32,630 --> 00:06:36,320 Diana Mousina : yes, it is. I don't think that we should be changing the 112 00:06:36,370 --> 00:06:41,520 Diana Mousina : inflation target or the wages target, but we've had now 113 00:06:41,720 --> 00:06:46,380 Diana Mousina : eight years of inflation being below the RBA's target band. 114 00:06:46,630 --> 00:06:49,469 Diana Mousina : So if we have a few years where it's above 115 00:06:49,470 --> 00:06:52,620 Diana Mousina : the target band, then I don't think that it is 116 00:06:52,700 --> 00:06:56,920 Diana Mousina : a big problem. The problem arises when you have inflation 117 00:06:56,920 --> 00:07:00,700 Diana Mousina : that's out of control, rising at 4% or more per 118 00:07:00,700 --> 00:07:03,460 Diana Mousina : annum. I think that that is not a good outcome, 119 00:07:03,460 --> 00:07:06,900 Diana Mousina : and that's what the RBA would want to avoid. That's 120 00:07:06,900 --> 00:07:10,820 Diana Mousina : why they should start hiking rates sooner, rather than later, 121 00:07:10,850 --> 00:07:14,360 Diana Mousina : to avoid going down the path where inflation becomes unsustainable. 122 00:07:15,050 --> 00:07:17,280 Sean Aylmer: I mean, you wrote a note yesterday, which said, " A 123 00:07:17,280 --> 00:07:21,470 Sean Aylmer: stitch in time saves nine," which is kind of what 124 00:07:21,470 --> 00:07:23,720 Sean Aylmer: you're talking about here. The Reserve Bank does need to 125 00:07:23,720 --> 00:07:26,110 Sean Aylmer: jump on it right now and not wait till June 126 00:07:26,110 --> 00:07:27,510 Sean Aylmer: or later in the year. Is that right? 127 00:07:28,400 --> 00:07:32,040 Diana Mousina : Ultimately. We also think if they don't raise rates next 128 00:07:32,040 --> 00:07:36,560 Diana Mousina : week, knowing that we have this global backdrop of high 129 00:07:36,560 --> 00:07:40,900 Diana Mousina : inflation occurring in all of our major counterparts, the US 130 00:07:41,090 --> 00:07:45,100 Diana Mousina : UK, Canada, New Zealand, Australia has lagged some of this 131 00:07:45,100 --> 00:07:49,600 Diana Mousina : pickup in global inflation, but our circumstances in the global 132 00:07:49,600 --> 00:07:53,140 Diana Mousina : picture aren't that different. We might have some domestic differences in 133 00:07:53,140 --> 00:07:55,680 Diana Mousina : how things are priced, how wages are priced, which has 134 00:07:55,680 --> 00:07:58,490 Diana Mousina : allowed us to not have these high inflation prints, but 135 00:07:58,750 --> 00:08:02,830 Diana Mousina : we ultimately can't escape the very high global price increases 136 00:08:02,830 --> 00:08:06,010 Diana Mousina : that we've seen recently, and Australia won't be able to 137 00:08:06,270 --> 00:08:09,570 Diana Mousina : escape that. If they don't go next week, it raises 138 00:08:09,570 --> 00:08:13,120 Diana Mousina : questions about how involved they are in the political process, 139 00:08:13,120 --> 00:08:15,160 Diana Mousina : and they wouldn't want to do that, especially at a 140 00:08:15,160 --> 00:08:18,480 Diana Mousina : time when they're going to be under review, I think. 141 00:08:18,730 --> 00:08:20,500 Diana Mousina : Even though we have an elected later in May, I 142 00:08:20,500 --> 00:08:23,080 Diana Mousina : don't think it should prevent them from making the right 143 00:08:23,080 --> 00:08:24,260 Diana Mousina : decision for the economy. 144 00:08:24,850 --> 00:08:27,080 Sean Aylmer: Yeah. I mean, the point is if it decides for 145 00:08:27,080 --> 00:08:29,630 Sean Aylmer: electoral reasons not to lift rates when the economic reasons 146 00:08:29,630 --> 00:08:33,340 Sean Aylmer: say it should, that's as political as not lifting rates. 147 00:08:34,050 --> 00:08:37,670 Diana Mousina : Yes, that's right. Then you run the risk of, later 148 00:08:37,670 --> 00:08:41,650 Diana Mousina : down the track, heading into a situation where inflation could 149 00:08:41,650 --> 00:08:46,440 Diana Mousina : get to over 6%, like it is in the US, and 150 00:08:46,559 --> 00:08:47,870 Diana Mousina : that will be a big problem. 151 00:08:48,340 --> 00:08:50,990 Sean Aylmer: Okay. What about the impact on the Aussie dollar, equities, 152 00:08:50,990 --> 00:08:54,839 Sean Aylmer: bonds, investing generally? What's it mean if we hit a 153 00:08:54,840 --> 00:08:57,709 Sean Aylmer: rate cycle. Our rate cycle starts next week and continues 154 00:08:57,710 --> 00:08:59,939 Sean Aylmer: through to one and a half percent cash rate by 155 00:08:59,940 --> 00:09:00,700 Sean Aylmer: the end of the year. 156 00:09:01,480 --> 00:09:05,310 Diana Mousina : It's a messy story at the moment. The market pricing 157 00:09:05,330 --> 00:09:08,250 Diana Mousina : is quite aggressive, as I said before, so the market's 158 00:09:08,250 --> 00:09:10,250 Diana Mousina : priced in a cash rate of about two and a 159 00:09:10,250 --> 00:09:12,610 Diana Mousina : half percent by the end of this year. So even 160 00:09:12,610 --> 00:09:15,450 Diana Mousina : when we start to see rate rises come through, I 161 00:09:15,450 --> 00:09:17,860 Diana Mousina : don't necessarily see it as being a huge negative for 162 00:09:17,860 --> 00:09:20,610 Diana Mousina : the equity market because the equity market should already be 163 00:09:21,000 --> 00:09:25,290 Diana Mousina : reflecting what the market pricing is. So in the short 164 00:09:25,290 --> 00:09:28,700 Diana Mousina : term, you might see some disruption to shares, some downside. 165 00:09:28,800 --> 00:09:32,500 Diana Mousina : We were already experiencing a bear market or a soft 166 00:09:32,660 --> 00:09:34,069 Diana Mousina : bear market, if you want to call it that, moreso 167 00:09:35,130 --> 00:09:38,330 Diana Mousina : in global shares, not as much so for Australia because 168 00:09:38,330 --> 00:09:41,820 Diana Mousina : we've been supported by high commodity prices. But we may 169 00:09:41,820 --> 00:09:44,550 Diana Mousina : see some short- term negatives for the share market, but 170 00:09:44,550 --> 00:09:46,530 Diana Mousina : I still think on a six to 12 month view, 171 00:09:46,780 --> 00:09:50,640 Diana Mousina : there's still enough positives for share markets to have a low, but 172 00:09:50,640 --> 00:09:54,309 Diana Mousina : positive return. We haven't seen the peak yet in earnings 173 00:09:54,760 --> 00:09:58,319 Diana Mousina : growth and expectations is still positive in Australia and globally. 174 00:09:58,320 --> 00:10:01,820 Diana Mousina : That should drive share markets higher. The economy fundamentally is 175 00:10:01,820 --> 00:10:05,730 Diana Mousina : still in a solid position, but inflation is getting to 176 00:10:05,730 --> 00:10:07,500 Diana Mousina : the point where it can start to get out of 177 00:10:07,500 --> 00:10:13,140 Diana Mousina : control. And until you start to see households fundamentally change 178 00:10:13,140 --> 00:10:16,770 Diana Mousina : their behavior from rate rises, which I think they will, 179 00:10:16,770 --> 00:10:18,929 Diana Mousina : obviously, do at some stage once you get too many 180 00:10:18,929 --> 00:10:22,699 Diana Mousina : rate hikes, the economy can still perform pretty well. So 181 00:10:22,700 --> 00:10:25,110 Diana Mousina : I think in that environment, share markets can still do 182 00:10:25,270 --> 00:10:29,870 Diana Mousina : okay. Bond yields, in the same vein as share markets, 183 00:10:29,900 --> 00:10:32,620 Diana Mousina : the bond market's already priced in all these rate hikes 184 00:10:32,870 --> 00:10:36,510 Diana Mousina : may see some short- term increases in bond yields. But 185 00:10:36,510 --> 00:10:39,120 Diana Mousina : in the longer end of the curve, I think it's 186 00:10:39,120 --> 00:10:43,070 Diana Mousina : difficult to see a substantial lift further, unless the market 187 00:10:43,220 --> 00:10:46,330 Diana Mousina : starts pricing it even more rate hikes for a year 188 00:10:46,330 --> 00:10:47,240 Diana Mousina : or two years' time. 189 00:10:47,970 --> 00:10:50,870 Sean Aylmer: Now, Diana, you are a busy person. You are hosting 190 00:10:50,870 --> 00:10:53,349 Sean Aylmer: panels at the Accounting Business Expo in Sydney today and 191 00:10:53,350 --> 00:10:56,390 Sean Aylmer: tomorrow. The Accounting Business Expo is a partner of Fear 192 00:10:56,390 --> 00:10:58,650 Sean Aylmer: and Greed. What are you going to be talking about? 193 00:10:59,200 --> 00:11:01,660 Diana Mousina : Oh, well, I think the focus will have to be on 194 00:11:02,170 --> 00:11:06,679 Diana Mousina : inflation after the data this week. But the overall story 195 00:11:06,679 --> 00:11:10,720 Diana Mousina : is around how Australia is placed over the next few 196 00:11:10,720 --> 00:11:14,230 Diana Mousina : years, what will be the growth drivers. We've, obviously, seen 197 00:11:14,230 --> 00:11:18,660 Diana Mousina : this big rebound in Australian growth after the pandemic, we've 198 00:11:18,660 --> 00:11:21,280 Diana Mousina : done very well. But what does the future look like? 199 00:11:21,280 --> 00:11:23,640 Diana Mousina : What will drive economic growth at a time when interest 200 00:11:23,640 --> 00:11:26,800 Diana Mousina : rates are getting hiked and fiscal policy is becoming a 201 00:11:26,800 --> 00:11:30,670 Diana Mousina : bit tighter? And what does that mean ultimately for industries 202 00:11:30,670 --> 00:11:32,160 Diana Mousina : like accounting and finance? 203 00:11:33,059 --> 00:11:34,840 Sean Aylmer: I look forward to it, Diana. I will be there. 204 00:11:34,950 --> 00:11:36,450 Sean Aylmer: Thank you for talking to Fear and Greed. 205 00:11:36,809 --> 00:11:37,570 Diana Mousina : Thank you so much. 206 00:11:37,630 --> 00:11:41,370 Sean Aylmer: That's AMP senior economist, Diana Mousina. Catch her at the 207 00:11:41,370 --> 00:11:44,930 Sean Aylmer: Accounting Business Expo in Sydney today and tomorrow. It's free 208 00:11:45,000 --> 00:11:48,280 Sean Aylmer: entry and it's at the International Convention Center. This is 209 00:11:48,280 --> 00:11:50,630 Sean Aylmer: the Fear and Greed Daily Interview. Join us every morning 210 00:11:50,630 --> 00:11:53,100 Sean Aylmer: for the full episode of Fear and Greed, Australia's most 211 00:11:53,100 --> 00:11:56,429 Sean Aylmer: popular business podcast. I'm Sean Aylmer. Enjoy your day.