# Aussie inflation and the price of oil in US dollars



## BradK (24 April 2008)

Hi, 

Can someone help me connect some dots? 

Aussie inflation will not stop going up until the world prices oil in a more stable currency other than the US dollar (Euro or Sterling?) 

If transport costs (petrol) are causing food inflation and it appears that the price of oil is going to keep on rising, that can only be bad for Aussie interest rates. 

The US Fed seems to be injecting more US dollars into the system which deflates the dollar and increases the cost of oil, which leads to higher prices at the petrol pump which leads to higher prices at the supermarket which leads to higher interest rates. 

I know its simplistic but

a) Will the world shove off the US dollar to pay for oil and choose something more appropriate? 
b) Are interest rates an ineffective tool to control inflation in this context? 

Brad


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## Timmy (24 April 2008)

The rise in oil price is not solely attributable to a weak USD ... if it was only this then the rising AUD (against the USD) would negate it to an extent ... so no matter how you price oil, its gone up.

In answer to your questions:

a) No (the USD is still the generic reserve currency and the currency of international trade)
b) What a great question ... I believe yes but would like to hear from some economists (sensible ones...).  To be fair to the RBA they have no other tool to attack inflation with.  All this talk about an independent RBA being responsible for fighting inflation is all good and well but the downside is the government can use the policy to scapegoat the RBA and to avoid taking the heat itself (to a certain extent) when appropriate fiscal and other policy could be much more effective.  For 'appropriate fiscal and other policy', read 'potential vote losing policy' ... which is why it is attractive to palm off the responsibility to the RBA.


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## Aussiejeff (24 April 2008)

BradK said:


> Hi,
> 
> Can someone help me connect some dots?
> 
> ...





With regard to (b), maybe the RBA could recall (and destroy) all $100 and $50 banknotes and issue convertible iou's instead - with conversion only possible when inflation falls below a set figure, like2.5%!! LOL 

On a more serious (bank)note, I think you are right in suggesting interest rate policy in todays complex financial world is extremelty limited in it's effectiveness. What an interest rate rise might potentially "fix" on the one hand, can totally screw up a myriad other sectors.... 


AJ


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## metric (24 April 2008)

the us fed are independent bankers. they own the us dollar and its printing and guarantee it with nothing. if the euro was introduced as the international oil currency, i doubt it would affect the us fed bankers at all, as they are probably the same bankers that issue the euro. and the AUD for that matter.

how much control/power over govenments do you think banks have? absolute?


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## son of baglimit (24 April 2008)

im certainly no economist, but many articles circulating currently discuss 'cost push' & 'demand pull' inflation.

it would appear that with australia running two economies currently, cost push is driving inflation in eastern australia, while demand pull drives inflation in the north & west. interest rates will help control demand pull, by subduing demand, but it only adds to cost push - so another answer is required there. in the past a lot of govt regulation on prices etc helped, but govt is reluctant to get involved these days.

so the answer ..................... ??????????


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## Smurf1976 (24 April 2008)

As long as central banks keep ramping up the money supply faster than real economic growth, that money will lose its value (that is, prices go up).

As long as underlying oil demand keeps rising rather than stabilising then falling in line with production, it becomes a more scarce commodity on the markets and its price thus ought to rise regardless of general inflation.

Put both together and you've got a rocket under the oil price.


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## tigerboi (24 April 2008)

I work in the transport industry where fuel has doubled in 2 years,this is where inflation has got its legs...fuel,the guy i work for his fuel component is over 50% of the return for one sydney-brisbane-sydney trip,2 years ago if it was 33% you would go broke.

I went to woolies yesterday & i havent done a shop on my own for about 3 years as im on the road most of the time,well shaft me with a blunt stick what about the prices!!! it then hit home about the fuel surge & what it does for inflation,look around everything you see will in one time or another been on a truck,i feel real sorry for families they must be eating the dates of the calender??however i can only see it getting worse...tb

lets not forget supply & demand as well,the yanks have gotta get their ar5es out of the middle east for the prices to come back(hoping...)


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## Buddy (24 April 2008)

Well, here's my  worth.

Maybe we are in a situation where bankers (or should I say w..), economists, and governments are totally out of their depth and in uncharted waters.  Maybe we are not in a conventional inflation cycle, rather a new phenonemon that is driven by shortages (rather than supply/demand which conventionally drives the inflation cycle). It's a subtle differance but I use the term "shortage" as its relates to peak oil, food production being unable to feed everyone on the planet, too many people for the supply of commodities.  Given this scenario, then the demand will always outstrip the supply, hence we may be entering a permanent inflationary cycle. There are ultimately no fiscal or monetary (known) methods of controlling this. Maybe the central banks and economists can tinker around for a while, and maybe get things under some sort of control, but ultimately (10 years, 100 years or whatever) none of the methods they use will work. So, unless they (central banks & ecominists) get some really big guns (as I have said on other threads) and do some serious population control, they will fail. Earth just aint that big!


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## Aussiejeff (24 April 2008)

Buddy said:


> Well, here's my  worth.
> 
> Maybe we are in a situation where bankers (or should I say w..), economists, and governments are totally out of their depth and in uncharted waters.  Maybe we are not in a conventional inflation cycle, rather a new phenonemon that is driven by shortages (rather than supply/demand which conventionally drives the inflation cycle). It's a subtle differance but I use the term "shortage" as its relates to peak oil, food production being unable to feed everyone on the planet, too many people for the supply of commodities.  Given this scenario, then the demand will always outstrip the supply, hence we may be entering a permanent inflationary cycle. There are ultimately no fiscal or monetary (known) methods of controlling this. Maybe the central banks and economists can tinker around for a while, and maybe get things under some sort of control, but ultimately (10 years, 100 years or whatever) none of the methods they use will work. So, unless they (central banks & ecominists) get some really big guns (as I have said on other threads) and do some serious population control, they will fail. Earth just aint that big!




Good points, Buddy. As you say, the planet is entering un-charted waters (hell, when I come to think of it, each and every day of human civilisation on this lump of space-rock has been a step into the unknown!) Maybe a new term could be introduced for the new type of inflation bug - maybe _"Permanent Super Inflation"_ or PSI!

AJ


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## nioka (24 April 2008)

I can't see how increasing interest rates is going to do anything but increase inflation further. Costs of production of almost anything you can name are increased further by adding higher interest. Put that on top of higher fuel prices and a world shortage of basic foods then add the extra costs of energy and water that are being promoted you have a certain increase in the cost of living. Adding higher interest costs is the last straw that will break the camel's back. There must be a better way.


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## projack (24 April 2008)

Found this worth to read article on Hyperinflationary Depression
http://www.kitco.com/ind/Ruff/ruff_apr212008.html
Look very scary to me.


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## MRC & Co (24 April 2008)

BradK said:


> b) Are interest rates an ineffective tool to control inflation in this context?
> 
> Brad




My idea of this is quiet simple.

IRs will slow the economy, less borrowing, less investment, less spending, lower demand.  

However, this inflation is cost-push, so you are slowing economic growth, in order to lower prices to off-set an increase in prices that has little to do with economic growth at this point.

Something has to be done with the supply side.  (I have not had a close look at CPI and it's drivers, however I gather most of the problem is due to the fact crude has gone para)!

The market itself is obviously not "working".  Though, in the long-run, will do.  Demand will drop to the point it will affect crude prices, and this will be a very sorry state for the economy.

As far as "appropriate use of fiscal policy", has anyone ever studied the "crowing out effect"?  I beleive it works (after having studied this myself) and explains why fiscal policy is a much more blunt instrument in comparison to monetary policy in a floating exchange rate environment.  Countries such as Hong Kong, fiscal policy is much more effective.

Cheers


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## nioka (24 April 2008)

MRC & Co;286232The market itself is obviously not "working".  Though said:
			
		

> Interest rates in Aust may reduce the demand for oil SLIGHTLY in Aus but it has no effect on world price of oil. If oil is getting in shorter supply relative to demand worldwide the price will keep rising. We have not felt the real effect of the oil price yet because of the rising value of the AUD. That must hit us soon.


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## MRC & Co (24 April 2008)

MRC & Co said:


> However, this inflation is cost-push, so you are slowing economic growth, in order to lower prices to off-set an increase in prices that has little to do with economic growth at this point.
> 
> Something has to be done with the supply side.




Nioka, pretty much what I said here, relative to Australia as to the question posed.

The supply side may include alternatives also, which is something fiscal policy (incentives) and micro policy have to address.


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