The RBA Must Quantify the Wealth Effect

Human behaviour is driven by how wealthy people feel. If a house you own goes up in value by $100K in a year, that affects not only your investment decisions but your personal consumption. You are far more likely to trade in for a new car, go on a holiday, or spoil yourself in a variety of ways. The RBA uses psychology itself, knowing full well that we are not only responding to its decisions but factoring in its future moves. To maximise its control over the economy, the RBA signals its planned trajectory, invariably emphasising how willing it is to react to inflationary pressures. It makes no logical sense, then, when the RBA publishes its inflation data but fails to include readily available asset price data alongside it. Omitting this is an act of self-protection to keep its options wide open and not have to acknowledge—and therefore account for—the consequences of its previous actions. If not outright cowardice, it is highly evasive. By including increases in house prices, share prices, and the like, the RBA would have a complete picture of what is truly driving demand. It would know exactly how much harder or softer it needs to step on the pedals—the main one being short-term money supply, though it can also influence the mid-to-long-term end by buying and selling government bonds. If the RBA factors in government cash handouts—which are delivered to bank accounts just like wages—it has no logical reason to exclude all the other non-cash wealth benefits accruing to households when trying to predict their behaviour.