Joust Weighs Up September Cash Rate Hike on FiveAA

Mark Bevan, founder and director of Joust, sits down with FiveAA to discuss the Reserve Bank of Australia's September cash rate announcement and how it could impact you.

Please find full transcript below.

"So it's certainly favouring the investor compared with a year ago, or even three years ago."

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Leon: Director of Joust, Mark Bevan. Mark, thanks for joining us today.

Mark: Good morning, Leon.

Leon: What's driving this?

Mark: Oh, look, the fear of inflation globally and here in Australia is the real issue.

Leon: Sentiment, then. People worrying that inflation is going to be more than what it is. Is that what we're saying?

Mark: Oh, I think already the inflation that we've already seen. The petrol prices are probably the one that gets the most attention, but cost going up and cost of living pressures are at the front of everyone's mind, and I think it's not just more anticipated, it's what we probably already experienced during the year this year.

Leon: All right. Now, Kathy sent me an interesting email, and good on you, Kathy. She wants to know the answer to this. She says, "When we hear about inflation rates and interest rates, what purchasable items are we talking about for which the comparison is made against?" Good question.

Mark: Yep. Look, that is a good question. The Reserve Bank would reference the consumer price index very closely, and there are a few variations of that, but typically the consumer price index reflects a basket of normal goods that households would generally purchase in a given period, so that'd typically be things like groceries, petrol and the like.

Leon: Yeah. Well, fuel is a big worry now, isn't it? Because that seems to be driving this whole push, doesn't it?

Mark: Yes, Yes. Look, it's certainly been a tough time at the petrol bowser for most of this year, and if I'm right, I think the excise that the government temporarily waived is going to come back on next month.

Leon: Oh, yeah. So that's going to be a double whammy, isn't it?

Mark: Well, I think that's roughly about 20 cents per liter, Leon.

Leon: Yeah. Yes.

Mark: So we'll all feel that.

Leon: Absolutely. Isn't it going to be a jolt to the economy?

Mark: Look, no doubt. There'll be discretionary spending, which people are just going to have to pull back on, so those sections of the economy that rely on discretionary spend would probably be forecasting somewhat of a downturn.

Leon: Now, there's another point to this, and a lot of very smart listeners have asked me to ask you this. If fuel is going up in price, that is going to mean that the cost of transporting items to the shelves where you can buy them will also increase.

Mark: Oh, without a doubt. You're right, Leon. Petrol has an impact really across the board, because so many of our items, including groceries, and for that matter, anything that gets delivered or transported has got an element of a fuel cost built into it.

Leon: Yeah. Now, just for the record, how much fuel excise and taxes is involved to every dollar of fuel in Australia at the moment?

Mark: I don't know the precise answer, but as I said earlier, I think there's about a 20 cent per liter excise that the government temporarily waved earlier in the year.

Leon: Yes.

Mark: Just to give us a bit of relief. And if I'm not mistaken, that's expected to come back on next month.

Leon: Yeah. That's going to mean prices will have to go. You see, we often think of these things, "Well, when I fill up at the browser, it'll be this." But of course, the next thing you have to consider is everything you buy off the shelf had to be transported there, so that's going to go up, too.

Mark: That's right. It's an import cost for a lot of businesses to get things from place to place. They've got to pay a lot. The fuel is the big input cost on all of those. And even, for example, I'm in airfares, you can imagine.

Leon: Oh, yeah. Yeah.

Mark: The fuel price is a critical input for our airlines.

Leon: Got to ask you this, and that is that in the situation where cost of living is being really heavily impacted, it looks as if things are only going to get worse for the time being. Is there a situation in the future, hopefully not far away, where a lot of this cost pressure will somehow diminish?

Mark: Well, the Reserve Bank's forecast are that inflation ought to peak at around 7.75 percent, and that's anticipated to occur end of this year, early next year.

Leon: Yeah.

Mark: So if the economics team at the Reserve Bank have got it right, the impact of what they're doing with interest rates, et cetera, which we'll see again this afternoon.

Leon: Yeah.

Mark: If it has the desired effect, hopefully that inflation rate does peak at 7.75 and can start coming down next year.

Leon: What's driving the inflation rate?

Mark: Well, as we discussed, fuel is a massive one.

Leon: Yep.

Mark: Wage pressure is another important input. It can be a bit of a vicious cycle in terms of everyone feels like they need a pay rise to cover the increasing cost of living.

Leon: Yes. Sure.

Mark: But pay rises tend to also make things more expensive, because they're an input cost.

Leon: Sure. What do we look like compared to our comparable country partners overseas with regards to inflation? Are we looking pretty good?

Mark: Yeah, definitely a bit better, Leon. The UK's dealing with inflation at around about 10 percent.

Leon: Geez.

Mark: And the US have already been above eight. They're hopeful that it's just starting to flatten, but hopefully, again, if our economists at the RBA are correct, and we don't go any higher than seven and three quarters, we are obviously just a little bit better off than some other parts of the world.

Leon: Can you explain what it is globally that's driving this inflation rate to be high enough that we say ouch? What is it?

Mark: Well, demand's a big thing, Leon. If there's more demand, I think I heard you commenting earlier, your demand for goods and limited supply.

Leon: Yes.

Mark: And of course, also, let's not forget COVID had an impact on supply chain.

Leon: Yeah, yes.

Mark: Making things more difficult to get around.

Leon: Yeah.

Mark: Et cetera.

Leon: Yeah.

Mark: And so less supply tends to drive prices higher, of course.

Leon: Would we be better off manufacturing more ourselves in Australia, given the fact that we are so reliant on global supply chains?

Mark: Oh, I think robustness in supply chains is a really valuable initiative, Leon. I think the more that we could manufacture and produce here locally, especially around items that are essential. The start of the pandemic was a classic example. The fact that we didn't really have production capability for PPE here in Australia and had to rely on getting it from overseas seems like a really fundamental, basic thing that we ought to be able to produce here.

Leon: Yeah.

Mark: And then not rely on.

Leon: Why don't we do that, then? What's stopping it?

Mark: Oh, well, generally, it'll be cost, Leon. If it can be produced cheaper overseas, the temptation is to not compete by making it when it's more expensive to make over here.

Leon: But then, again, we run the risk, then, of being prisoners of a global supply chain, and given that we are small beer globally in numbers, we don't matter as much.

Mark: I agree with you, Leon. There's certainly some risk in being relied on these overseas supply chains, particularly for essential goods.

Leon: Okay.

Mark: And again, when we're in a crisis.

Leon: All right. Here's a question: we often complain about interest rates going up. On the other side of the coin, who benefits?

Mark: Well, certainly people with funds to invest. Retirees that have got funds on deposit.

Leon: Yeah.

Mark: They've had a pretty rotten old time of it for many, many years.

Leon: Yes.

Mark: Hardly being able to earn any interest on their deposit.

Leon: Yeah.

Mark: So, for example, they can now earn interest rates as sort of three and four percent, essentially, where they were earning less than one percent for several years.

Leon: Right now, it favours the investor, that is, the person who's got money to invest.

Mark: Yes. Yes. But putting that into historical context, Leon, rates are still historically fairly low.

Leon: Yes.

Mark: So it's certainly favouring the investor compared with a year ago, or even three years ago.

Leon: Yes.

Mark: But not 20 years ago.

Leon: Look, you've been most helpful. Mark Bevan, he's the founder and director of Joust, making sense of the whole money business that affects us all.