Sunday, May 11, 2008

Spinning inflation yarn Down Under

Oi, G'day, mate.
Yeah, g'day. Mate.

Howzit goin', mate?
Awright. Mate.

Howz the missus, mate?
Yeah, good, mate.

Think its gunna rain, mate?
Umm, dunno. Mate.

Seen the prices on rice, mate?
Yeah, mate.


Milk, bread, chooks, eggs, mate?
Too right, mate.

Oi, mate.

Reckon we need a raise, mate?
Naw, mate. It'd only hurt the economy, mate.
Don'tcha read the economists, mate?
The consensus is in, mate. Things will get worse before they get better. Mate.

"Cut demand and inflation will ease" by Ross Gittins, the SMH's Economic Editor.
slowing demand will impose pain without getting inflation down, we're told.

But, as the Reserve sought to demonstrate in yesterday's statement on monetary policy, this analysis of the source of our inflation problem is mistaken. It contains some truth, but only some.

[The] the 18.9 per cent rise in petrol prices[?] Petrol has a weight of just one-22nd of the consumer price basket.

[The] the 5.7 per cent rise in the price of food. Included in this are rises in the prices of vegetables (9.7 per cent), milk (11.6 per cent), bread (9 per cent), chicken (11.6 per cent) and eggs (5.9 per cent)[?] [They] have a combined weight of just one-30th of the consumer price basket. {NB: Barry Ritholtz' take on inflation ex-inflation ex-inflation.}

so let's have no more misleading talk of cost-push inflation pressure.

We are having to pay more for our imported oil and some foodstuffs, but that's more than compensated for [mate] by the higher prices we're getting [mate; yar, youse and me] for our exports of coal and iron ore (and wheat if the improved weather lasts).

Our terms of trade have improved [mate], which makes us richer [ yar, mate, youse and me] with more money to spend. [What? ya thinks you don't have more money, mate?] That's why we're enjoying a positive demand shock, not a negative supply shock. [Mate.]

Rest assured [mate]: if we succeed in reducing demand pressure, we will get the inflation rate down. And applying the brakes is the only way to get it down.

"Sustained high inflation a danger" by Alan Wood, The Australian's Economics Editor.
The Australian economy is a powder keg of rising prices, rising inflation expectations and accelerating wage demands.

inflation runs at 4.5 per cent (4 per cent underlying rate) in the six months to December this year and then only declines gradually to 2.75 per cent in the half year to December 2010.

This means that inflation will remain at dangerously elevated levels for the next two years, presenting the Reserve Bank with a serious policy challenge: how does it keep inflation expectations under control for such a long period?

It is inflation expectations that really matter, because once they start to rise it becomes much harder and much more painful -- politically, in terms of jobs, profits and growth, and socially as unemployment rises -- to get inflation back under control.

Inflation expectations are starting to rise. The RBA's survey of market economists shows that their expectations of inflation in the year to June 2009 have risen from 2.6 per cent last November to 3 per cent this month. More worrying, the expectations of union officials have jumped form 3 per cent to 4 per cent over the same period. The various wage measures cited by the bank, such as the wage price index, show wage rises stepping up to match rising inflation.

Equally worrying, these are averages and many workers are seeing their wages falling behind inflation, causing growing union agitation for bigger wage rises. In both the private and public sectors, there have been recent settlements of 5 per cent.

The message of the forecasts is that this is no time to be seeking higher wages.
Ya see, mate, there are different kinds of bubbles.

First ya gotcher asset bubbles.

Now, mate, asset bubbles are good and Alan Greenspan, the Greatest Economist of All Time, mate, old Greenspan reckons it's no good at all to try to prick one of them kind of bubbles, mate. Can't go round having economists acting like regulators and gettin in the way of all that money being made off'n high asset prices.

Let 'em run as far as they can, and when they pop, well, mate, old Greenspan says every economist knows how to pick up the pieces. Ya just turn on the guvmint's printin' machine, mate. Ya bail 'em out, mate. Easy peezy.

That David Uren, Murdoch's Economics correspondent sez, mate, "While conceding that world financial markets were still "fragile", [mate], the central bank's overview highlighted how much they had improved since the bailout of Bear Stearns in March.

But wage bubbles, mate. Now that's another story, mate. Gotta pop that bubble, mate, before its formed, mate. Muster every ministry to keep wages down mate, if ya knows what's good for youse.

Yeah, mate, all you gotta do is keep yer confidence up and yer wages down and she'll be right, mate. Good as rain.

Yar, too right, mate.


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