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Australian inflation data defies mainstream macro predictions – again

One of the on-going myths that mainstream (New Keynesian) economists propagate is that monetary policy (adjusting of interest rates) is an effective way to manage the economic cycle. They claim that central banks can effectively manipulate total spending by adjusting the cost of borrowing to increase output and push up the inflation rate. The empirical experience does not accord with those assertions. Central bankers around the world have been demonstrating how weak monetary policy is in trying to stimulate demand. They have been massively building up their balance sheets through QE to push their inflation rates up without much success. Further, it has been claimed that a sustained period of low interest rates would be inflationary. Well, again the empirical evidence doesn’t support that claim. The evidence supports the Modern Monetary Theory (MMT) preference for fiscal policy over monetary policy. Even though the Reserve Bank of Australia has not pursued a QE program (fiscal policy saved our economy from recession during the GFC), it has persisted with very low historic interest rates. And as yesterday’s latest inflation data from the Australian Bureau of Statistics – Consumer Price Index, Australia – shows, the RBA is struggling to push it inflation rate into the so-called target policy range of 2 to 3 per cent. The data shows that the All Groups CPI grew by 1.9 per cent in the 12 months to September 2018 and the so-called core analytical series – Weighted Median and Trimmed Mean – used by the RBA to assess whether interest rates should shift or not grew by less than that. The most reliable measure of inflationary expectations are flat and below the RBA’s target policy range.

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