Think Big: Inflation may or may not be transitory, but the Delta variant is
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‘The Delta Variant’ isn’t a huge stretch as the title suggestion for a new Bond film. But for now, it means everyone in greater Sydney is stuck at home until at least the end of July.
In research this week, CBA economist Gareth Aird assessed how that might affect the policy outlook as ‘rona rears its head.
Jobs data on Thursday showed Australia’s unemployment rate fell to just 4.9% in June — the lowest level in over a decade.
But as Aird notes, “things have changed”. We might not have that four-handle for long.
The jobs market has absorbed various other snap lockdowns across Australia because while people missed shifts, they weren’t stood down.
But Sydney is finishing up week three of what’s now stretching to a five-week lockdown, and as community transmission remains prevalent the Berejiklian government has left the door wide open to further restrictive measures.
“A lockdown of ~7 weeks in Greater Sydney could see a significant number of NSW workers stood down,” Aird said.
Melbourne has also introduced a snap lockdown of its own as cases rise.
That could translate to a ~50,000 increase in unemployment levels through July and August.
Which (all else being equal) would flow through to ~0.4% increase in the u/e rate, Aird said.
Could the Delta outbreak be serious enough to alter the path of monetary policy?
Aird said that while it adds some doubt to the outlook, CBA isn’t yet ready to change its view that the RBA will start raising rates at the end of 2022.
The bank’s forecast is notably divergent from that of the RBA itself, which so far has shown no willingness to even hint at a change to its post-COVID mantra; no rate hikes until 2024.
Factoring in the Sydney lockdowns, Aird noted strength in the jobs market forms a key part of the RBA’s policy objectives.
In that context, if unemployment climbs again, it may prompt a shift in RBA policy — but only with respect to its bond purchasing program.
At its July meeting, the RBA flagged a reduction in its monthly bond purchases on the secondary market, from $5bn/m to $4bn/m through to November.
Aird previously predicted the central bank would then scale back to $3bn/m through to February next year.
CBA is holding that forecast for now, but in the event of extended lockdowns such a reduction is “less likely to materialise”, Aird said.
When it comes to rates though, Aird highlighted the prevalent use of the word “transitory” (or “transient”) — deployed by central bankers in the US and Australia to discuss the outlook for inflation.
While annual US inflation rose at decade-plus highs through the June quarter, US Fed Chair Jerome Powell remains steadfast in his view that upward pressure on consumer prices will tail off into 2022.
Whether or not the inflation uptick will remain transitory is still a topic of fairly hot debate.
Regardless, Aird thinks the T-word is more applicable to the nature of Delta variants and ‘rona lockdowns.
“Lockdowns are very much transitory in nature and they should be a thing of the past next year, given the acceleration in the vaccine rollout,” he said.
In contrast, rock-bottom rates and historic levels of fiscal spending will still be a thing of the present and future.
Consumer confidence is sitting at decade-highs, while Aussie households are estimated to have saved north of $100bn in extra cash during the pandemic.
So while lockdowns cloud the outlook, ‘this too shall pass’.
And the same forces putting upward pressure on wages and inflation will continue to build in 2022, Aird said.