Thursday, October 26, 2006

Disappointing inflation number

Inflation in Australia at an annual rate of 3.9% over the 3 months to September continues a streak of relatively high inflation figures well outside the RBA’s targeted range of 2-3%. The press have focused on the role of food and house prices – food prices should continue to increase due to the impact of the drought.

The price increases are troublesome because they are broadly-based. As David Bassanese points out in today’s AFR (subscription required) in the year to September 2004 only 30% of the 90 odd goods and services in the CPI basket increased in price. Over the past year 60% of foods recorded inflation above 3%.

Hence the Reserve Bank’s ‘underlying inflation rate’ is now a bit over 3%. It is only gentle inflation but is nonetheless disappointing given the historically low unemployment and the amazingly good prospects for the Australian economy generally.


derrida derider said...

When everybody's talking about labour shortages you must expect some inflation to be not far behind. But I reckon its not time to panic yet. If this represents the fruit of the rapid output switching needed for the commodities boom then its a 'one-off' inflationary impulse.

Provided of course that it doesn't get locked in to expectations. So if you think wagesetters have rational expectations it's not much to get upset about, but if you believe in adaptive expectations ...

hc said...

I agree that the economy is closer to full capacity than in years and that not the time to panic. But the inflation outcome is troubling with the foolish minimum wage judgement today at 5.6% which is well in excess of inflation is dangerous..

And Ian Harper's argument that higher minimum wages will induce more workers to seek jobs rather than stall the elimination of unemployment in Australia is very unconvincing.

But generally I remain optimistic about the Aussie economy.

Bring Back EP at LP said...

A lot more rate rises to come if Access is correct.

RBA is quite upfront about labour scarcity and infrastructure problems.

Moreover the RBA core measures are still on an upward curve which should continue next quarter.

Harps decision is a mystery to me given his history.
Is he doing a Joe Isaac

Fred Argy said...

HC, I don't think it's true to say that the increase is 5.6% per annum. Alan Wood works out the annual increase at $20 if you allow for the period since the last decision and the December 1 starting date. It is really a moderate increase. It is broadly in line with what the AIRC might have delivered. So one wonders what was the point of the change apart from some loss of transparency in process?

hc said...

Fred as I have argued before I think to regard wages as a contribution towards achieving redistributive justice is a dangerous philosophy.

Wages should reflect the productivity of workers not ideas about social justice which are the concern of the public sector. Lets hope that the strong economy is sufficient to prevent a rise in unskilled unemployed. I had hoped unemployment might be cut even further.

Fred Argy said...

As you know, Harry, I agree that in a perfect world, it would be better to do away with the minimum wage and introduce an alternative fiscal mechanism to ensure all workers shared in prosperity. But this assumes (a) governments can be relied upon to sustain the compensation process year after year and (b) the fiscal instruments used are non-distorting and have no effects on incentives. Since I believe these two premises are unrealistic, I regrettably prefer a world with a minimum wage which rises broadly in line with inflation – so that over time, it steadily declines relative to median earnings.

As for the employment and inflation effects of the FPC decision, rest assured. Although the Government submission warned of dire consequences and Ministers have repeately argued that higher minimum wages are bad news for the unskilled unemployed, the Prime Minister now tells us they were really joking! He assures us that there will be no employment or inflationary effects.

Given the modest scale of the wage increase awarded and its relatively small coverage, Howard could well be right this time around.

hc said...

I think Howard appreciates the political potential of this decision to dig into the IR critique provided by the ALP.

Not very worthy but thats probably what he has done.