Sawford formula revisited
The latest CPI figures are out so it is time to revisit the Sawford formula. The formula states that if two or more of the unemployment, inflation and interest rates rise over a full, three-year electoral cycle, the government will lose. Conversely, if two or more fall the government will be returned.
The inflation news
The June quarter change in the Consumer Price Index was 1.2 per cent, and the annual inflation rate for the year ending 30 June 2007 was 2.1 per cent. This quarter’s rate was higher than expected, and if the quarter was annualised the inflation rate would be 4.8 per cent.
If volatile items are removed, the annual inflation rate to 30 June 2007 was 2.7 per cent. Both the high quarter rate and the highish annual rate once volatile items were removed have fueled speculation of an interest rate increase following the meeting of the Reserve Bank Board on the first Tuesday of August or September 2007.
For the historical record, average annualised inflation since March 1996 is 2.5 per cent. Average annualised inflation between March 1983 and March 1996 was 5.2 per cent.
The Sawford formula
Interest rates and unemployment are easy to call. The Reserve Bank interest rates are up since the 2004 election (indicated by the red line in the following graphs) and the unemployment rate is down.
More contestable is the inflation rate. Clearly the annual rate at the end of June 2007 is lower than it was in September or December 2004. However, the annual rate without volatile items is up, as are the two quarterly rates (albeit for one, only marginally).
It’s a hard call. Is it two up and one down, two down and one up, or one up and one down and one unchanged?