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, October 3, 2011

Aussie dollar down to 0.9658 US cents--14% off its 2011 highs--bad news for inflation (chart)

According to this recent RBA research paper, a 10% decline in the Aussie dollar results in a one percentage point increase in consumer prices over the next 3 years, with about half of this effect coming through in the first year. The currency is currently about 14% lower than its peak, and about 7% less than its average over 2011. I was expecting a 2H depreciation of the Aussie dollar as a function of an appreciating US dollar, but for reasons associated with higher US inflation and higher US yields. We got the former, but not the latter. Now, in a 2007 RBA RDP Kristoffer Nimark finds that a 100 basis point increase in interest rates (ie, four hikes) roughly decreases inflation by about 0.40 percentage points (annualised) after about one year, and less in the second year. Interesting comparison. A lot of economists are expecting the RBA to downgrade its core inflation forecasts for 2011 to about 3%, with some, such as Stephen Koukolous, forecasting very low 0.3% prints in Q3. But the RBA's previous SMP forecasts have assumed a AUD/USD of 1.07 cents. What do they assume now, and what are the ramifications for inflation?