RBA suspects inflation may be lower than what the current numbers suggest – Westpac

RBA Deputy Governor Guy Debelle says that the reweighting of the CPI has, in the past, resulted in a lower rate of inflation, noes Justin Smirk, Research Anals at Westpac.

Key Quotes

“In the 7th Warren Hogan Memorial Lecture, RBA Deputy Governor Guy Debelle gave an insightful and pertinent talk on uncertainty and its impact on monetary policy. But following on from yesterday’s weak CPI update, which suggested the Australian economy may have entered a “lowflation” trap, we found it interesting that Dr Debelle took some time to outline how the reweighting of the CPI is likely to lower the current pace of inflation.”

“The ABS will very shortly update the expenditure weights in the CPI. Because of substitution bias, history suggests that measured CPI inflation has been overstated by an average of ¼ percentage point in the period between expenditure share updates. While we are aware of this bias, we are not able to be precise about its magnitude until the new expenditure shares are published, because past re-weightings are not necessarily a good guide. It is also not straightforward to account for this in forecasts of inflation. However, from a policy point of view, the inflation target is sufficiently flexible to accommodate the bias, given its relatively small size.”