Inflation Clouds Our Optimism?

By Glenn Dyer | More Articles by Glenn Dyer

Just when we were basking in the strength of the economy, along comes someone to remind us of the need for a dark cloud or three.

Data from the first two months of 2007 paint an economy continuing to grow with retail sales strong, employment solid, confidence up and housing edging higher (we had the long list of good news last Friday).

But then Reserve Bank of Australia (RBA) assistant governor (economic), Malcolm Edey had to go and play Mr Gloomy by warning on Friday that the outlook for inflation was still higher than ideal.

He said in a speech in Sydney the factors that last year pushed up underlying inflation, and which precipitated rate increases, remain in place in the economy.

It was his second public outing this month: the first was on March 7 and was to an Australian Industry Group forum where you would have thought comments on the Australian economy at the moment might have been delivered.

Well, they were but they were brief and more general than the ones used in Friday’s speech at a forecasting/outlook conference also in Sydney

“The RBA’s most recent forecast was for underlying inflation measure, its favoured measure of price pressures, to recede to 2.75 per cent, from an earlier forecast of three per cent, in 2007 and 2008.

“The Bank’s inflation forecast, as presented in the Statement on Monetary Policy in early February, was that underlying inflation would decline slightly over the next two years to around 2¾ per cent.

“This outlook is still higher than ideal: it implies that inflation is more likely to be too high than too low in the period we can foresee.

“Information that has become available since that forecast was made suggests that some of the factors pushing up underlying inflation last year remain in place.

“The December quarter national accounts recorded relatively strong growth in demand and output.

“We also have some additional data on wages, which showed that growth in the Wage Price Index remained around 4 per cent in annual terms at the end of last year (Graph 16).

“This needs to be interpreted carefully, because the September quarter outcome, and hence also the annual figure, were artificially held down by a change to the timing of last year’s minimum wage decision.

“The outcome for the December quarter, which was unaffected by that, was a quarterly increase of 1.1 per cent, which was at the top end of its historical range.”

The key words were “This outlook is still higher than ideal: it implies that inflation is more likely to be too high than too lower in the period we can foresee”.

And the usual warning which had analysts factoring in the headline ‘Rates to Rise in 07’ came thus “As always the bank will be giving careful consideration to these developments, along with other incoming data, as it continues to review inflation prospects month by month”.

Which it always does.

Well, yes he would say that, he’s a central banker and while quite a few parts of the economy are going well, there’s always a factor or two that remain out of kilter with what is acceptable, such as inflation or wages.

But you’d rather be here than in New Zealand or even China where rates rose for a third time in a year on the weekend; or even in the US where a possible rate cut could be more probable if the US housing market worsens.

But Mr Edey was also positive about the outlook for the Australian economy.

“The short term outlook for the world economy looks like it will be favourable to further growth in Australia,” he said.

“Longer term forces associated with the emergence of China and India are boosting trade within the Asian region, and are having significant effects on global relative prices.

“The resultant rise in Australia’s terms of trade has provided a substantial boost to aggregate incomes and spending.

“Overall, the Australian economy has had a lengthy period of expansion. The economy has moved closer to full capacity, with recent indicators pointing to stronger conditions in the second half of last year.”

Some commentators are saying that April/ May RBA board meetings could be important for Australia for the immediate direction of interest rates rather than later in the year, around August.

May will have the benefit of the March quarter CPI due out in the last week of April.

But there’s a further point: the economy has shrugged off last year’s three rate rises and inflation is still on the high side.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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