The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Monday, September 12, 2011

Uren: RBA will not go soft on inflation (But it already has!)

A classic introduction to the normally dovish David Uren's article in The Australian today:

"THE world is going soft on inflation, but the Reserve Bank is determined not to be a part of it [CJ: But David, it already is complicit]."

Perhaps this is relative to David's dovish predispositions. But the fact is that Australia's central bank has not touched monetary policy since November last year despite two quarters--or six months--of above-target core inflation (ironically based on the two 'core' measures the RBA designed itself). Interestingly, Uren raised something I have questioned here for a long-time: has the Bank of England dropped its inflation target (the same question will be asked of the RBA if Q3 prints high and they do not respond):

"The Bank of England, meeting on the same day, held rates at 0.5 per cent, while inflation is at 4.4 per cent and the bank thinks it will rise to 5 per cent. Inflation has now been above its 2 per cent target for four years and is expected to stay there another two years, which invites the question whether the inflation targeting regime has been abandoned."

Uren also highlights the budding global inflation problem--partly fuelled by super-loose and 'fiscalised' monetary policy in the developed world and pegged currencies leading to internal wages/prices adjustments and thus higher export prices in the developing world--which I have been carrying on about here for donkey's years (see also chart):

"In the advanced countries, inflation has risen to 3.1 per cent, according to last week's update from the OECD. This is up from 1.6 per cent a year ago and the 0.5 per cent averaged in 2009....


In Australia, the Reserve Bank puts our rising underlying inflation rate mainly down to domestic factors, particularly rising unit labour costs, although it has also pointed to the fact that China is now exporting inflation, rather than the deflation that helped bring down the cost of many consumer goods around the world over the past decade.

The RBA contends that with a floating exchange rate, there is no reason why Australia's inflation should be swept along with the rest of the world.

But studies have shown a large correlation between national inflation rates. A European Central Bank study looked at national inflation trends in 22 OECD countries over a 45-year period and found that 70 per cent of the individual variability was in fact countries moving together.

International Monetary Fund chief economist Olivier Blanchard suggested early last year that inflation targets should be relaxed and possibly raised to 4 per cent. He suggested 10 per cent was the level at which inflation should be feared.

It is in the interests of advanced countries to allow higher inflation, as it devalues their debts. Although it costs creditor nations like China, tolerating higher inflation is evidently preferable to the tougher decisions, like allowing the exchange rate to rise.

But RBA governor Glenn Stevens made it clear last week he would have none of it. With higher inflation would come higher interest rates. "There is no reason that savers, any more than wage earners, would be prepared simply to accept an erosion of their financial position," he said.

Raising the bank's target would not make it any easier to deal with the structural changes being forced by the resources boom, he said. "We would simply waste more real resources as everyone sought to protect themselves from the higher inflation,"he said."