Good morning. My new digs in Bondi are three flights of stairs up and for the duration of the long weekend, I was wheezing as I lugged boxes. And it’s not had the time to catch it back this week: rate rises in the US, UK and Switzerland, all of 2021’s gains smashed off the S&P 500, and the S&P/ASX 200 getting uncomfortably close to bear market territory. Panic is acceptable. Panic selling is a mistake. Breathe in, check out our survival guide.
Today we’re going to be talking about statistics. Hang on, it’s more relevant than you might expect.
We need to bag one lagging data
The Reserve Bank is navigating an overcooked economy and its most sacred crystal ball is past the use-by date.
It’s unfortunate enough that Governor Philip Lowe and the Board have a date problem. His 2021 call that there would be no cash rate increases “until 2024 at the earliest” will be haunting him for years. What gets less attention is he also has a data problem to make his job even more difficult.
In a fast-evolving market, it is simply unacceptable that Australia’s best indicator of inflation is months stale by the time it lands in the hands of the cash rate deciders at 50 Martin Place. Normally, stale data is a minor inconvenience; when inflation is running at its fastest pace since Howard, it threatens policy mistakes.
Inflation hawks monitor the Consumer Price Index (CPI). It monitors price changes for nearly 900,000 goods and services over any quarter January to March, for example. The data is published publicly a month later. Which is to say: If something changes in February, decision-makers learn about it in late April.
This data is usually of monthly frequency across the world. Australia is the only G20 member (the others, like Indonesia, Mexico and South Africa) to publish inflation quarterly.
Old-world Europe is out front. The European Central Bank views how much prices shifted in May, on the last day of May. This, in a union of 19 states and 750 million people.
With fresher data, it would be easier to identify trends and turning points. It could help soften the nasty surprises the Reserve Bank seems to be developing a habit of delivering. The CPI in April, published belatedly, finally moved the Reserve Bank to act in May. Would a change of heart have come earlier with higher-frequency data? Stephen Miller, investment strategist at GSFM Funds management does.
“Monthly CPI data would have notified the RBA of its transitory narrative around inflation much sooner,” he says. “It could have responded sooner, corrected the course it was on. I have no doubt whatsoever.”
None of which is especially controversial. The Reserve Bank has requested monthly inflation data since at least 2010. In a 2017 speech, deputy governor Guy Debelle said it would help “identify changes in the trend in inflation sooner”. The Reserve Bank had no comment on this story.
The potential change to monthly reporting has been floated for more than a decade. The Australian Bureau of Statistics (ABS) initially knocked back the suggestion in 2010 for cost reasons. By the middle of 2018, it had reconsidered. The agency “committed to development work” because new technology had slashed data collection costs. It is expected to take one year.
Fast forward nearly four years to March 2022, when the ABS announced it was “examining the feasibility of a monthly CPI”. A discussion paper on work to date and methodology is expected to be published in August 2022. With a year of test data needed in order to verify and baseline the new series, access could be years away for policymakers. When asked this week why the delay had taken three years, the ABS said the pandemic was to blame.
But with development done according to the ABS’ own schedule by mid-2019, months ahead of the pandemic, you can’t help wondering if the task simply dropped down the to-do list.
Part of the problem may be budget cuts. In 2019 the outgoing ABS chief, David Kalisch, warned a 30% decline in operational funding over the previous decade had endangered key statistics. In 2018, the agency mentioned that continued funding would be necessary to “support the ongoing maintenance costs to establish and maintain a monthly CPI.”
And there are those who say the ABS should focus on other things. AMP chief economist Shane Oliver wants the ABS to shorten and to align the big gulfs in time between when data is collected and when it is reported: a month for CPI, six weeks for wages and two months for Gross Domestic Product. Other developed countries do it in half the time or less. That seems a good enough place to start: More funding for the ABS.
Monthly inflation data won’t turn Philip Lowe into a prophet, and it won’t prevent policy errors. High-frequency data is often noisy and full of misleading wiggles.” Useful, but “no panacea”, according to David Plank, head of Australian economics at ANZ.
But when each adjustment to the cash rate impacts the billions of dollars in investments and thousands of jobs that are prospering and struggling, we should give our policymakers the best tools we can to use. The ones they begged for since 2010.”
At the time, the ABS estimated the change would cost $15 million a year. And collection costs are likely a fraction of that today because of web scraping and card scanner data. Few million dollars is a pittance for the opportunity to improve monetary policy decision-making, even a little.
How long will this bear market last? With Bubbleville rapidly deflating, Mark Lamonica has sought guidance from history to determine just how much farther markets remain above normal, and the answer is that there is still a way to go. One telltale sign that the bear market is nearing a bottom is when retail investors throw in the towel. Local investors are not buying the dip anymore, but they are not ready to give up all hope either.
For those who are brave of heart, there are two separate pieces I read which discuss where defensive investors might consider putting some money to work (these boys only be for the bold). Anton Tagliaferro and Peter Warnes. Also, bonds are back!
