He could have added six conflicted private sector Board members too. The AFR reports today that infamous hedge fund investor, Jim Rogers, believes the RBA bowed to political pressure by not raising rates in the face of very high inflation. If only he knew the half of it. As I have argued for a long time here, the RBA is evidently worried about the consumer and political backlash associated with having to hike rates to address inflation (if the backlash is big now with 8% disposable income growth, 4.9% unemployment, and 7.5% mortgage rates, what will it be like when growth slows and unemployment rises?). The RBA seems willing to accept core inflation running at 3-4% pa if the only alternative is lower growth and higher unemployment. Here is Jim Rogers quoted by the AFR today:
“If I was the RBA, I would have raised interest rates,” the hedge fund pioneer and commodities enthusiast told The Australian Financial Review yesterday. “There is inflation in the world and if you don’t kill it quickly it starts taking on a life of its own and things get more out of control . . . the RBA knows that but I think they are bowing to political pressure.”
You can already see high inflation entrenching itself as an acceptable part of Australian life. Most of the major media commentators--perhaps Terry McCrann excluded--argue (incorrectly) that if only you exclude this variable or that item, inflation does not look so bad. Get set to read a lot more of this nonsense. One popular example was removing the "deposit and loan facilities" item. Yet doing this only cut core inflation from +3.7% to +3.4% (the target is +2.5%).
Another common refrain is, Look at inflation on a "year-ended" basis. The core numbers then come in at +2.7% pa, which is just above the target. That means placing equal weight on the very low inflation rates measured in the third and fourth quarters of 2010 as the very high inflation rates reported in the first two quarters of 2011.
It is as stupid as answering the question, "How fast is my car travelling now?", by measuring the average speed since you got into your car.
The RBA does not do this, even though they encourage the media to focus on year-ended numbers. To understand the true pulse of inflation, they annualise the last quarter and the last six months' worth of data. On both counts, the two underlying benchmarks of inflation in Australia, which strip out all the unusual numbers, are running way above the RBA's target even after we have benefited from a 20% currency appreciation and supposedly weak economic growth.
