1 00:00:04,110 --> 00:00:06,960 Sean Aylmer: Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. 2 00:00:07,170 --> 00:00:10,380 Sean Aylmer: Inflation for the December quarter has come in at 1. 9%, 3 00:00:11,039 --> 00:00:14,820 Sean Aylmer: well above forecasts of around 1. 6%, taking the annual 4 00:00:14,820 --> 00:00:18,150 Sean Aylmer: rate to 7. 8%. The all- important underlying rate of 5 00:00:18,270 --> 00:00:22,800 Sean Aylmer: inflation was also above expectations. There was a lot riding 6 00:00:22,800 --> 00:00:25,200 Sean Aylmer: on the figure, with hopes of a pause and interest 7 00:00:25,200 --> 00:00:29,340 Sean Aylmer: rates seemingly dashed by the surprise result. Diana Mousina is 8 00:00:29,370 --> 00:00:32,850 Sean Aylmer: the Senior Economist at AMP. Diana, welcome back to Fear and Greed 9 00:00:32,850 --> 00:00:33,900 Sean Aylmer: for 2023. 10 00:00:34,260 --> 00:00:35,640 Diana Mousina: Thank you so much for having me. 11 00:00:36,150 --> 00:00:39,510 Sean Aylmer: So, what did you make of the inflation figures this week? 12 00:00:39,960 --> 00:00:42,900 Diana Mousina: Well, the clear number to me that is going to 13 00:00:42,900 --> 00:00:46,260 Diana Mousina: cause a problem for the RBA's deliberations at their February 14 00:00:46,260 --> 00:00:49,290 Diana Mousina: meeting is the trimmed mean number. We saw that that 15 00:00:49,290 --> 00:00:52,680 Diana Mousina: was revised up for last quarter. So the September quarter 16 00:00:52,680 --> 00:00:56,580 Diana Mousina: number now looks higher, and it came in above the 17 00:00:56,580 --> 00:01:00,000 Diana Mousina: RBA's own forecast. So they were expecting core or trim 18 00:01:00,000 --> 00:01:04,380 Diana Mousina: mean inflation to peak at 6.5% over the year to the December 19 00:01:04,380 --> 00:01:07,440 Diana Mousina: quarter, and it's come in at 6. 9%. Now, I 20 00:01:07,440 --> 00:01:10,260 Diana Mousina: mean, it's not a significant miss, but it's enough of 21 00:01:10,260 --> 00:01:14,819 Diana Mousina: a miss that the RBA will probably raise the cash 22 00:01:14,819 --> 00:01:18,000 Diana Mousina: rate again at it's February meeting, even though we had 23 00:01:18,000 --> 00:01:22,080 Diana Mousina: been of the view that the RBA was done raising rates for this cycle. 24 00:01:22,740 --> 00:01:25,200 Sean Aylmer: Okay. It might just be worth explaining what the trimmed 25 00:01:25,260 --> 00:01:27,119 Sean Aylmer: median is. What's it cut out? 26 00:01:28,200 --> 00:01:30,420 Diana Mousina: So the trim mean is the best measure of core 27 00:01:30,450 --> 00:01:33,060 Diana Mousina: inflation in Australia. In a lot of other countries, it's 28 00:01:33,060 --> 00:01:37,319 Diana Mousina: called core or excluding volatile items. In Australia, it takes 29 00:01:37,319 --> 00:01:40,709 Diana Mousina: out the top 15 and the bottom 15% of those 30 00:01:40,709 --> 00:01:45,900 Diana Mousina: most volatile items. So, it gives a good reading of 31 00:01:45,990 --> 00:01:50,280 Diana Mousina: the underlying pressures of inflation in the economy, excluding one- 32 00:01:50,280 --> 00:01:53,070 Diana Mousina: off events. For example, if there's a flood that raises 33 00:01:53,070 --> 00:01:56,700 Diana Mousina: prices for fruit and vegetables, that will be excluded for 34 00:01:56,700 --> 00:01:59,700 Diana Mousina: that particular quarter. But the issue has been that we've 35 00:01:59,700 --> 00:02:04,170 Diana Mousina: seen a lot of different components of inflation move up 36 00:02:04,170 --> 00:02:07,260 Diana Mousina: quite significantly over the past year and that has creeped 37 00:02:07,290 --> 00:02:09,120 Diana Mousina: into core inflation. 38 00:02:09,840 --> 00:02:11,970 Sean Aylmer: Okay. So I'll get onto rates in a moment. But, 39 00:02:11,970 --> 00:02:13,980 Sean Aylmer: what are some of the things in the inflation figure 40 00:02:14,190 --> 00:02:16,590 Sean Aylmer: that really have risen quite a bit that the Reserve 41 00:02:16,590 --> 00:02:17,610 Sean Aylmer: Bank would be worried about? 42 00:02:18,630 --> 00:02:22,410 Diana Mousina: Well, the usual themes in the inflation story, actually in 43 00:02:22,410 --> 00:02:25,350 Diana Mousina: line with expectations, I guess. It's just that price rises 44 00:02:25,350 --> 00:02:28,710 Diana Mousina: have continued to be stronger than anticipated. So the key 45 00:02:28,710 --> 00:02:33,660 Diana Mousina: things that are increasing in price services, we've seen household 46 00:02:33,660 --> 00:02:37,470 Diana Mousina: equipment and services rise. So, things like different types of 47 00:02:37,470 --> 00:02:43,980 Diana Mousina: household services like cleaning services, childcare, costs related to appliances 48 00:02:43,980 --> 00:02:45,480 Diana Mousina: in the household as well. So that's more of the 49 00:02:45,480 --> 00:02:48,990 Diana Mousina: good side rents arising. They're running at about 4% on 50 00:02:48,990 --> 00:02:53,970 Diana Mousina: an annual basis. We've also seen eating out and holiday 51 00:02:53,970 --> 00:02:57,090 Diana Mousina: travel prices rise significantly in the December quarter, which they 52 00:02:57,090 --> 00:03:00,750 Diana Mousina: normally do always because of seasonal demand and school holidays. 53 00:03:01,080 --> 00:03:04,139 Diana Mousina: But it's been more than usual this time round. Other 54 00:03:04,139 --> 00:03:08,340 Diana Mousina: housing related costs, electricity, gas prices. Fuel was up for 55 00:03:08,340 --> 00:03:11,880 Diana Mousina: the December quarter. Clothing and footwear prices normally are flat 56 00:03:11,910 --> 00:03:13,380 Diana Mousina: in December, or even have a little bit of a 57 00:03:13,380 --> 00:03:16,710 Diana Mousina: fall, because we see more sales compared to usual. Because, 58 00:03:16,710 --> 00:03:20,970 Diana Mousina: remember that the headlined CPI figures are not seasonally adjusted. But this 59 00:03:20,970 --> 00:03:23,820 Diana Mousina: time round clothing and footwear prices rose, because of very 60 00:03:23,820 --> 00:03:27,450 Diana Mousina: high demand from consumers. And food prices are still continuing 61 00:03:27,450 --> 00:03:30,060 Diana Mousina: to increase as well, because we have had some issues 62 00:03:30,060 --> 00:03:33,840 Diana Mousina: with flooding impacting the supply of fruit and vegetables in 63 00:03:33,840 --> 00:03:37,290 Diana Mousina: Australia and also other food prices, but also because commodity 64 00:03:37,290 --> 00:03:40,200 Diana Mousina: prices have been so high for so long and they're 65 00:03:40,200 --> 00:03:42,480 Diana Mousina: only now just starting to come down. 66 00:03:43,470 --> 00:03:47,010 Sean Aylmer: Okay. So onto interest rates. You said earlier that a 67 00:03:47,010 --> 00:03:50,190 Sean Aylmer: 25 basis point increase is likely when the Reserve Bank 68 00:03:50,190 --> 00:03:54,420 Sean Aylmer: meets on sixth February. That's a change in your forecast, 69 00:03:54,420 --> 00:03:56,970 Sean Aylmer: because you didn't think that they would raise rates, but 70 00:03:56,970 --> 00:04:01,980 Sean Aylmer: I suppose obviously the number and that underlying number was 71 00:04:01,980 --> 00:04:04,230 Sean Aylmer: so high that the going to have to now. Is 72 00:04:04,230 --> 00:04:04,890 Sean Aylmer: that what you're saying? 73 00:04:05,820 --> 00:04:08,730 Diana Mousina: Well, I think that the risk is if the RBA 74 00:04:08,790 --> 00:04:12,540 Diana Mousina: doesn't do anything, then the risk is that inflation is 75 00:04:12,540 --> 00:04:18,300 Diana Mousina: more persistent and that core inflation remains high for much 76 00:04:18,300 --> 00:04:22,920 Diana Mousina: of this year. So, another rate rise probably doesn't increase 77 00:04:22,920 --> 00:04:25,920 Diana Mousina: the risk of a recession or a significant downturn too 78 00:04:25,920 --> 00:04:29,010 Diana Mousina: much, given that the economy's still holding up quite well. 79 00:04:29,010 --> 00:04:32,610 Diana Mousina: We had very strong retail sales figures for November, which 80 00:04:32,610 --> 00:04:36,960 Diana Mousina: were impacted by sales for Black Friday, Cyber Monday. But, 81 00:04:36,990 --> 00:04:41,339 Diana Mousina: they're still showing that consumer spending is holding up much 82 00:04:41,339 --> 00:04:44,279 Diana Mousina: better than anticipated, given that we've had so many rate 83 00:04:44,279 --> 00:04:48,089 Diana Mousina: rises last year. So, I think that the economy can 84 00:04:48,330 --> 00:04:52,890 Diana Mousina: handle another rate rise, because inflation is just too high 85 00:04:52,890 --> 00:04:55,650 Diana Mousina: and the RBA will be concerned that the trimmed mean 86 00:04:55,650 --> 00:05:00,060 Diana Mousina: or the core numbers running above their own forecasts. So, 87 00:05:00,750 --> 00:05:03,330 Diana Mousina: February I think is a done deal and the risk 88 00:05:03,330 --> 00:05:06,990 Diana Mousina: is then with another one, maybe two. But our view 89 00:05:06,990 --> 00:05:09,390 Diana Mousina: at the moment is that February, and then no more 90 00:05:09,390 --> 00:05:10,770 Diana Mousina: rate rises from there. 91 00:05:11,490 --> 00:05:13,530 Sean Aylmer: Stay with me, Diana. We'll be back in a minute. 92 00:05:19,980 --> 00:05:24,480 Sean Aylmer: Our guest this morning is AMP Senior Economist Diana Mousina. Lots 93 00:05:24,480 --> 00:05:26,580 Sean Aylmer: of talk late last year and even so far this 94 00:05:26,580 --> 00:05:30,600 Sean Aylmer: year that inflation will have peaked in the December quarter. 95 00:05:30,600 --> 00:05:33,270 Sean Aylmer: Do you think that's still the case? That's still the argument? 96 00:05:34,050 --> 00:05:36,210 Diana Mousina: Well, all the inflation signals that I'm looking at are 97 00:05:36,210 --> 00:05:39,690 Diana Mousina: pointing down. Commodity prices are down from their highs with 98 00:05:39,870 --> 00:05:42,839 Diana Mousina: a lot of talk about gas prices. But gas prices 99 00:05:42,839 --> 00:05:44,669 Diana Mousina: in Europe and the US are now back to where 100 00:05:44,670 --> 00:05:48,540 Diana Mousina: they were early last year. All transport- related costs are 101 00:05:48,540 --> 00:05:51,239 Diana Mousina: now back to their pre- COVID levels. So things like 102 00:05:51,240 --> 00:05:55,200 Diana Mousina: shipping costs have slowed significantly, because all those supply- chain 103 00:05:55,200 --> 00:05:58,289 Diana Mousina: bottlenecks that we saw over the past year have now 104 00:05:58,290 --> 00:06:02,190 Diana Mousina: mostly passed through. Consumer demand for a lot of those goods has declined, 105 00:06:02,190 --> 00:06:05,700 Diana Mousina: and also some of the issues related with the logistical 106 00:06:05,700 --> 00:06:10,830 Diana Mousina: challenges during COVID and closed borders have really disappeared now, 107 00:06:10,860 --> 00:06:13,409 Diana Mousina: because the global economy is completely open and China is 108 00:06:13,410 --> 00:06:15,930 Diana Mousina: reopening its economy as well. The one part of the 109 00:06:15,930 --> 00:06:19,290 Diana Mousina: inflation story that could still be concerning is what happens 110 00:06:19,290 --> 00:06:25,349 Diana Mousina: to wages. And if wages continue to rise in Australia, 111 00:06:25,350 --> 00:06:27,660 Diana Mousina: we think that wages growth will peak somewhere at about 112 00:06:27,660 --> 00:06:30,180 Diana Mousina: three and three quarters of a percent on an annual basis. 113 00:06:30,540 --> 00:06:33,720 Diana Mousina: We're just over 3% at the moment. But, that level 114 00:06:33,720 --> 00:06:36,930 Diana Mousina: of wages growth I don't think is unsustainable. Other economies 115 00:06:36,930 --> 00:06:40,800 Diana Mousina: like the US or the UK have had wages growth 116 00:06:40,800 --> 00:06:44,190 Diana Mousina: running at four, five, even 6% on some measures on 117 00:06:44,190 --> 00:06:47,010 Diana Mousina: an annual basis. And Australia's just not going to get there. 118 00:06:47,279 --> 00:06:50,039 Diana Mousina: We don't have the same structure in our labour market 119 00:06:50,070 --> 00:06:52,710 Diana Mousina: that would allow for that high level of wages growth, 120 00:06:52,710 --> 00:06:55,140 Diana Mousina: because we've had a big increase in labor supply, whereas 121 00:06:55,260 --> 00:06:57,930 Diana Mousina: some of those other economies like the US haven't had 122 00:06:57,930 --> 00:07:00,960 Diana Mousina: that big increase in labor supply. So, you do get 123 00:07:00,960 --> 00:07:04,500 Diana Mousina: more wages growth for those people who are employed. So, 124 00:07:04,890 --> 00:07:07,950 Diana Mousina: I am of the view that inflation will slow from here. 125 00:07:08,160 --> 00:07:12,150 Diana Mousina: Australia lagged the rest of the world in the pickup 126 00:07:12,210 --> 00:07:15,420 Diana Mousina: in inflation by about six months. US inflation peaked in 127 00:07:15,450 --> 00:07:18,600 Diana Mousina: the month of June in 2022, and I think that 128 00:07:18,630 --> 00:07:21,570 Diana Mousina: the peak for Australia will be in the December quarter. 129 00:07:21,600 --> 00:07:25,500 Sean Aylmer: Okay. So hopefully inflation's peaked. We may get another interest 130 00:07:25,500 --> 00:07:29,370 Sean Aylmer: rate rise or two. What about economic growth? The US 131 00:07:29,370 --> 00:07:32,850 Sean Aylmer: is likely to hit a recession at some point. What 132 00:07:32,850 --> 00:07:34,230 Sean Aylmer: do you think will happen to Australia? 133 00:07:35,370 --> 00:07:38,460 Diana Mousina: Well, I think the US will actually skirt around a recession, 134 00:07:38,460 --> 00:07:41,820 Diana Mousina: but probably avoid it. I mean, it might not feel 135 00:07:41,820 --> 00:07:44,010 Diana Mousina: very good, because the unemployment rate's likely to go up 136 00:07:44,010 --> 00:07:46,890 Diana Mousina: in the US. But, at the same time, the unemployment rate 137 00:07:46,890 --> 00:07:48,750 Diana Mousina: in a lot of economies, in a lot of advanced 138 00:07:48,750 --> 00:07:52,410 Diana Mousina: economies now, is at multi- decade lows. The only way 139 00:07:52,410 --> 00:07:55,440 Diana Mousina: for it now to go is up. So we've had 140 00:07:55,440 --> 00:07:59,940 Diana Mousina: a very strong rebound over the past two years and 141 00:08:00,000 --> 00:08:01,860 Diana Mousina: we're going to have to pay for some of that 142 00:08:01,860 --> 00:08:04,920 Diana Mousina: this year. And that's only natural when interest rates go up. 143 00:08:04,920 --> 00:08:07,740 Diana Mousina: So slow growth in the US, but I think we will, 144 00:08:08,040 --> 00:08:10,200 Diana Mousina: the US will avoid a recession. I don't think a 145 00:08:10,200 --> 00:08:12,960 Diana Mousina: recession is a done deal for Australia either, but it 146 00:08:12,960 --> 00:08:15,540 Diana Mousina: does depend on where interest rates go. And if we 147 00:08:15,540 --> 00:08:19,440 Diana Mousina: see the cash rate getting towards 4%, then we will 148 00:08:19,440 --> 00:08:23,100 Diana Mousina: have a significant growth downturn, in our view. But we 149 00:08:23,100 --> 00:08:25,980 Diana Mousina: don't think the RBA needs to get interest rates to 150 00:08:25,980 --> 00:08:28,950 Diana Mousina: that level to see inflation come down. I think the 151 00:08:28,950 --> 00:08:32,309 Diana Mousina: next few months we will see more signs that inflation 152 00:08:32,309 --> 00:08:32,880 Diana Mousina: is slowing 153 00:08:33,330 --> 00:08:36,630 Sean Aylmer: Diana Mousina, Senior Economist at AMP, I can't let you go without 154 00:08:36,630 --> 00:08:38,970 Sean Aylmer: asking you about house prices. You are still of the 155 00:08:38,970 --> 00:08:40,650 Sean Aylmer: view that there's a way to go? 156 00:08:41,040 --> 00:08:42,990 Diana Mousina: Well, we still think that there's another eight or 9% 157 00:08:43,350 --> 00:08:46,860 Diana Mousina: to go for the downturn in the national housing market. 158 00:08:46,860 --> 00:08:49,860 Diana Mousina: Of course, there will be variations across the states and 159 00:08:49,860 --> 00:08:53,610 Diana Mousina: capital cities, but the longer that we see the RBA 160 00:08:53,610 --> 00:08:57,750 Diana Mousina: delay the peak in the cash rate, then the longer 161 00:08:57,750 --> 00:09:01,470 Diana Mousina: the property price downturn will take, because we know that 162 00:09:01,470 --> 00:09:04,590 Diana Mousina: there are lags involved with raising interest rates. So, we 163 00:09:04,590 --> 00:09:07,350 Diana Mousina: think that the bottom in home prices will come somewhere 164 00:09:07,650 --> 00:09:10,050 Diana Mousina: around the middle of this year. But, if the RBA 165 00:09:10,050 --> 00:09:13,800 Diana Mousina: keeps raising rates, then the bottom will be somewhere closer 166 00:09:13,800 --> 00:09:15,270 Diana Mousina: to the end of the year. And we'll only see 167 00:09:15,270 --> 00:09:19,020 Diana Mousina: that upturn in home prices once the RBA starts cutting 168 00:09:19,020 --> 00:09:21,870 Diana Mousina: rates, which I think is a likelihood in early next year. 169 00:09:22,800 --> 00:09:25,170 Sean Aylmer: Diana, I have known you for a few years now, 170 00:09:25,170 --> 00:09:27,090 Sean Aylmer: and every time I meet you or talk to you, you 171 00:09:27,090 --> 00:09:30,900 Sean Aylmer: are such a positive person. I'm afraid today you've done 172 00:09:30,900 --> 00:09:33,719 Sean Aylmer: your dash. You are the bearer of ill tidings. 173 00:09:34,650 --> 00:09:35,729 Diana Mousina: I'm sorry for that, Sean. 174 00:09:37,110 --> 00:09:39,000 Sean Aylmer: Can't do much about it. Thank you very much for 175 00:09:39,000 --> 00:09:40,590 Sean Aylmer: talking to us here on Fear and Greed. 176 00:09:41,100 --> 00:09:41,790 Diana Mousina: Thanks, Sean. 177 00:09:42,030 --> 00:09:45,179 Sean Aylmer: That was AMP Senior Economist Diana Mousina. This is the Fear 178 00:09:45,179 --> 00:09:47,460 Sean Aylmer: and Greed daily interview. Join us every morning for the 179 00:09:47,460 --> 00:09:51,059 Sean Aylmer: full episode of Fear and Greed, Australia's most popular business podcast. 180 00:09:51,270 --> 00:09:52,770 Sean Aylmer: I'm Sean Aylmer. Enjoy your day.