Inflation genie out of the bottle no matter what the Reserve Bank does

Regardless of what the Reserve Bank does on its Melbourne Cup day monthly Tuesday meeting, the inflation genie is out of the bottle worldwide and one central bank's efforts won't stop it.

On Melbourne Cup day morning, Flow spoke with Canstar's editor-at-large Effie Zahos about the Australian central bank's efforts to bring inflation back to its target rate.

Hear the full interview with Effie Zahos editor-at-large at Canstar on the Flow podcast player below:

Consumer confidence has fallen for a fifth week in a row to levels last seen during the early COVID-19 lockdowns. The 1.5 per cent decline in the weekly ANZ/Roy Morgan index followed the September quarter consumer price index print that surpassed expectations to hit 7.3 per cent annually. The news pushed the inflation-related category up 6.6 per cent to its highest weekly value in more than a decade.

Another 1.2 per cent was shaved off national dwelling values in October, marking the sixth monthly decline in home prices as measured by CoreLogic. Sydney and Melbourne may have been first of the starting blocks but home prices in Brisbane are falling the fastest, dropping two per cent for the month. CoreLogic's research director Tim Lawless says it's too early to call the end of sharp price declines.

"With Australian borrowers facing the double whammy of further interest rate hikes along with persistently high and rising inflation, there is a genuine risk we could see the rate of decline re-accelerate as interest rates rise further and household balance sheets become more thinly stretched."

The value of the Australian dollar value had rallied from 62 cents in the US dollar on 14 October to 64 cents just prior to the RBA meeting, still at a low not seen since April 2020 when the impact of COVID-19 and related restrictions were first being felt. Prior to that, the AUD has not been this low since March 2003 as it rallied from an October 22, 2001 low of almost 50 cents. The low dollar has been a boost for farmers already enjoying strong commodity prices due to the Russian war on Ukraine, but has fast diminished Australian consumers' purchasing power for imported goods.

Australia is not alone in the haze from the inflation genie. Euro zone inflation has surged to hit a record high, pointing to further interest rate hikes from the European Central Bank. Consumer price growth in the 19 countries sharing the euro accelerated to 10.7 per cent in October from 9.9 per cent a month earlier, beating expectations in a Reuters poll for 10.2 per cent as inflation in Germany, Italy and France all rose more than forecast, data from Eurostat, showed on Monday.

Energy prices continued to drive inflation but food and imported industrial goods all pushed prices sharply higher even as services played only a marginal role this time. The ECB has raised rates a combined 200 basis points in the past three months and promised further tightening as soon as December. But markets have started to anticipate a slowdown in rate hikes as a recession looms and gas prices have come down from record highs. But policymakers are likely to be concerned that underlying price growth, which filters out volatile food and fuel prices, continued to accelerate, pointing to broadening price pressures, which raises the risk that high inflation will get entrenched.

Markets priced out some rate hikes last week after ECB chief Christine Lagarde provided a sombre outlook for economic growth. Klaas Knot, the hawkish head of the Dutch central bank, also helped push expectations back up after he said that a lot more policy tightening is still needed and the December hike will be a choice between 50 and 75 basis points.

Economists now expect the bloc to be in recession through the end of the first quarter of 2023 and expected such a downturn to be naturally deflationary.

Gas prices, though still high, are also well down from their late-summer peaks, raising hopes that Europe may find it easier to wean its economy off Russian gas than many had feared.

But the weak euro is adding to price pressures while wage growth is also inching up, a key worry as a wage-price spiral would make inflation even more difficult to break.

PragerU argued in a Halloween release that inflation and currency debasement, not barbarians, brought down the Roman empire and the reign of Henry VIII:

The Bank of Japan has bucked the trend, keeping ultra-low interest rates and maintaining its dovish guidance, cementing its status as an outlier among global central banks tightening monetary policy, as recession fears dampen prospects for a solid recovery.

Japan's central bank also announced on Friday plans to increase the frequency of its bond buying next month, doubling down on efforts to defend its ultra-loose monetary policy.

BOJ Governor Haruhiko Kuroda said Japan was making some progress toward achieving his 2 per cent inflation target, as rising prices heighten the chance more firms will increase wages next year. Kuroda told a news conference the central bank was nowhere near raising interest rates, with inflation likely to fall short of its 2 per cent target for years to come:

"We expect wages to gradually rise reflecting recent inflation. For now, we don't expect inflation to stably and sustainably achieve 2 per cent inflation next fiscal year."

As widely expected, the BOJ left unchanged its -0.1 per cent target for short-term interest rates and a pledge to guide the 10-year bond yield around 0 per cent under its yield curve control (YCC) policy.

The central bank also maintained its dovish guidance projecting that short- and long-term rates will remain at "present or lower levels."

"He's still basically wedded to the current policy settings of the BOJ," Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore. "It's basically telegraphing to the world that he's not going to change tack anytime soon."

While more modest than other major economies, Japan's core consumer inflation hit an eight-year high of 3% in September, exceeding the BOJ's 2% target for six straight months.

The BOJ's ultra-easy policy has helped trigger sharp yen declines that inflate the cost of importing already expensive fuel and raw materials, prompting the government to intervene in the market to prop up the currency.