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."

Sunday, July 10, 2011

RBS: Risk that Carbon Tax bleeds into core inflation and higher interest rates

From RBS tonight:

"From our initial read of the multitude of reports released today, there is no estimate of the impact of the tax on underlying inflation (ie, as measured by the Reserve Bank's average of trimmed mean and weighted median CPIs).

We expect that underlying inflation will spike when the carbon tax is introduced next year given the headline CPI exerts a dragging effect on underlying inflation, with a higher (lower) headline CPI associated with higher (lower) underlying inflation.

This will make it harder to assess the underlying inflation rate when the tax is implemented, although the bigger issue is whether higher headline inflation become embedded in higher inflation expecations and leads to higher ongoing underlying inflation.

History shows that modelling the inflation impact is difficult

Note, though, that estimating tax effects is harder than it seems. For example, the last major tax reform in Australia was the introduction of the 10% Goods and Services Tax, which replaced a raft of inefficient wholesale sales taxes.

At the time, the then Government estimated that these tax changes would add 1.9% to the CPI, whereas the consensus economist estimate was higher at 3.4%. As it turned out, the impact was almost half-way in between at 2.9% (oddly, the Treasury modelling released today claims that the effect was 2½%)."