Transcript of Question & Answer Session Recent Developments in Inflation and the Economic Outlook

Hi, Michael. I want to ask a question about your chart with capacity utilisation because it seems the RBA likes that measure lately. You do quote that a few times in your speech. Just historically looking at the chart, I always thought that the capacity utilisation series seems to be negatively correlated with trimmed mean inflation. But you do say that, you know, The series does seems to indicate that utilisation seems elevated. What do you think about that negative correlation historically? And also from the same NAB survey, monthly, all the other indicators like output prices actually trending down as well.

So that’s a really good question. So I think we think it is, it depends on the circumstances and the nature of the shock is how I would answer that. So if you look at back through that period, where it looks to be sort of inverse whatever, through the 2010s and stuff. That’s the mining boom. Okay. So this is non-mining capacity utilisation. So what we knew had to happen during that period when things were going gangbusters in the mining industry, the exchange rate appreciated by a lot, right. And that sort of dampened conditions in the non-mining part of the economy. And so something is here. So, the inflationary pressures, I think were, were coming from what was going on in things related to the mining boom. So you saw sort of disinflationary sort of type pressures happening in the non-mining part of the economy. So that’s like a really interesting period there where the exchange rate did a lot in one particular sector was doing a lot. Here now we think we’re in a period where until very recently, the exchange rate hasn’t done a lot. And it’s really, this main story’s been about, sort of, you know, capacity pressures and I think that’s why that aligns. So it’s just really carefully thinking about when, when you think … the nature of the shock matters.

Thank you for your speech. It was great. Great speech. I was just wondering, I was just very curious. I’m also an astute graph reader and, I thought it was interesting that the public demand growth was slightly less than expected. And there’s been a lot of conversation around too much government spending or government regulation contributing to inflation. But my question is more tangential to that, it’s how much of that pickup in private sector demand do you think was driven by the public sector as opposed to lower interest rates?

That’s, it’s an interesting question. I don’t have an answer for it off the top of my head to even think how to, so your question is, to what extent was it the public spending supporting the private sector as opposed to the reduction in interest rates? Well I think it depends on what period you’re talking about. So the reductions in interest rates through 2025, I mean, we could see the impacts of those. I mean through in the housing market, I mean the more interest sensitive. But we probably hadn’t, it’s probably a bit too early to have seen much of an impact, I think, in other parts of the economy. So to that extent, we probably really weren’t thinking that the reductions in the cash rate we, you know, had things not changed. We probably would’ve thought that we’d start to see the bigger impacts of those, through this year.

So that’s, so the monetary easing in 2025. You could see the effects in the housing market but was probably too early to see much in other parts of the economy. So that was other forces happening then. Now, one of those forces was public spending, but there are other things going on as well, the recovery in real household incomes, for example, there from earlier, from the stage three tax cuts, as inflation was coming down, increased purchasing power. So there’s a whole bunch of other things going on there as well.