Inflation

Inflation is approaching concerning levels in Australia.

Inflation is a result of an economy running beyond its capacity.

Australia has not been able to respond to terms of trade booming due to massive capacity restraints.

We cant hire enough skilled workers due to lack of training and a delayed immigration response. We haven't spent money on simple stuff like communications, rail and ports.

The floating currency has assisted as a shock absorber but at some level this will become less effective.

Contemplate a Yuan revaluation increasing costs of Chinese imports or a fall in commodity prices reducing demand for the AUD. If TVs (ect) that cost the same as 15 years ago join food and rents and rise by 4% annually - what happens to interest rates?

The strong AUD has shielded us so far from oil prices and imported inflation. But when the terms of trade flatten or fall, who wants to own AU?. We are as leveraged as the Yanks and have a far smaller manufacturing base. Our current account deficit is far beyond the previously fearful 6% of GDP despite our terms of trade being multiples of past levels.

This is frightening...

What happens to our CAD when copper, coal and iron ore drop 30%? Who would want to hold AUD when we have no ability to attract FOREX.

Whithout mining, what are we good at?

Property speculation and banking?



We are kidding ourselves...

If we begin to import inflation from our trading partners and the stuff we buy that is the same price as 10 years ago starts rising it is not hard to see 5%+ inflation.

The RBA will ramp rates as hard as they need-to in such a situation.

While I dont think they will reach the 20% rates of late 80s and 90s - contemplate the average Aussie paying off his $350K mortgage at 10% - let alone higher.

We have a market trading at extremely high PEs in the face of this risk and a bunch of pollies ready to pour more fuel on the fire with $30bn worth of cash and no real reform.

I am typically bullish by nature, but inflation worries me to the core.

Costello tells lies about his comfort in a 2% headline rate, but this is a false number. The same BS number exceeded 4% recently when the underlying was far lower and you can guess which number he chose then???

Anyone else contemplating interest rates 1%+ more than current due to inflation?

Some more on Mr Costello's attempts to cast the most favourable light on his own situation from today's 'Crikey.com'
Quote:
"On November 1 last year, The SMH carried a front page interview with Peter Costello in which the Treasurer said the commodities boom was over.


Fast forward 12 months and he’s at it again, predicting a “huge tsunami” will engulf financial markets, the US economy is going down, China will weaken, Australia will fall into recession, the earth with split asunder and issue forth plagues of toads and serpents, foul wraiths and dark vapours. And boils, don’t forget boils. Australians will always suffer more boils under a Labor government than under a Coalition government.


And that’s why the Reserve Bank shouldn’t lift interest rates. Or something like that.


Which leads to the challenge of picking the odd one out: Warren Buffett, Hu Jintao, Don Argus, Peter Costello.


According to Buffett, the subprime wash-up will hurt for up to two years, but the US economy overall will move forward. (The Sage of Omaha is in South Korea inspecting the local subsidiary of the Israeli industrial tools company he bought last year – just another little bit of globalisation.)


According to Argus, commodity demand and prices are staying high despite US weakness. The chairman told the BHP AGM in London overnight that Chinese growth is continuing and India is following it, 10 or 15 years behind.


According to Hu, well, according to the Chinese government, September quarter growth printed at an annualised rate of 11.5 per cent, down a fraction from the June quarter, but the same as the annualised rate for the first nine months of the year. China’s about to overtake Germany as the world’s third biggest economy.


And Prophet Pete Costello is predicting extreme difficulty ahead which will turn into Armageddon if Labor wins the election and he’s not given the chance to be prime minister.


The line of the day goes to Macquarie Bank international economist Mark Tierney: “Perhaps the new Copernican revolution is the discovery that the world economy does not orbit the US.”


Someone should tell Pete. "
End Quote

Yes, I wouldnt be suprised to see rates above 10% within the next 3 years.


Same as I expect labour is likeley to win the election.

I found this chap interesting

I am a life long Liberal voter. I have never been a swinging voter. However this election I am voting Labour. you see I work in the mining industry and the economy is just to darn good under John Howard. we need Labour in there so that we can get unemployment back up to 10 per cent. This will allow us to find and hire people with realistyic expectations on remuneration. Should do wonders for the housing crisis, too!.

Mike Young, Floreat,

A letter to the editor of the west.

[B said:

BSD's post modified by Smurf to make a point or two[/B]

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Not trying to be rude or funny here. I just thought changing a few words in BSD's original post was the best way to make my point without writing something long and complex.

Inflation is approaching concerning levels in Australia.

Inflation is a result of an increase in the money supply.

Australia has not been able to respond to terms of trade booming due to massive capacity restraints.

We cant hire enough skilled workers due to lack of training and the consequences of 1990's economic rationalism, outsourcing and privatisation. We haven't spent money on simple stuff like communications, rail and ports and water, gas and electricity.

This is frightening...

Anyone else contemplating water and food shortages, inability to find a tradesman to do the work, housing becoming unaffordable, the lights going out and interest rates 1%+ more than current due to our collective short termism.

Inflation is such a scam by the RBA.

They're worried about inflation, but they create the Inflation be creating more money out of "Thin Air"

Mogambo Guru describes the scam of inflation best

Kimosabi said:

Inflation is such a scam by the RBA.

They're worried about inflation, but they create the Inflation be creating more money out of "Thin Air"

Mogambo Guru describes the scam of inflation best

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The RBA doesn't calculate inflation, the ABS does.

I hope the flat-earthers like this simpleton (in the link) don't take over this thread, I would prefer a discussion based in reality.

BSD said:

The RBA doesn't calculate inflation, the ABS does.

I hope the flat-earthers like this simpleton (in the link) don't take over this thread, I would prefer a discussion based in reality.

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So you aren't an Austrian economist....in the GW sense

BSD said:

The RBA doesn't calculate inflation, the ABS does.

I hope the flat-earthers like this simpleton (in the link) don't take over this thread, I would prefer a discussion based in reality.

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Hopefully Dictionary Definitions won't disturb your concept of reality.

in·fla·tion

noun.

Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency

http://dictionary.reference.com/browse/inflation

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It is because of people's ignorance that institutions like the Reserve and Central Banks of the World are allowed to continuously inflate money suppy which makes the money you had in your pocket in the morning, worth less by the afternoon. Have a look at Zimbabwe to see an extreme example of this happening as we speak.

If we had a "Sound Monetary" system, there would be hardly any INFLATION because there is only so much gold and silver in the World.

It's a joke how the independant RBA controls both Money Supply and Interest Rates. While the RBA has this control of Inflation and Interest Rates they can manipulate Booms and Busts. It's also a joke how the Australian Population accepts this because of their ignorance.

Now if your so worried about Inflation, you'd better get down to Parliament and start demanding answers from your politicians as to why they allow the insidious scourge of Inflation to continue by a "independant institution", of which Kevin Rudd made a number of references in the debate supporting the continuation of an "independant" Reserve Bank.

lol. Just reading through this thread and crikey people get immotive about politics. Makes me wonder if the people posting derive there income from the great political machine.

here's an example of taxpayers money at work... I received about 6 letters from the major parties the last two weeks, each nicely addressed to moir.

Kevin Rudd has his own web site www.rudd07.comn.au spewing forward spam on pages where I really don't want to see hes four eyed face.

Politicians are there to serve them,selves otherwise they would be out of a job. Come the next election I'm voting for myself. I'll make a box, Vote for me party.

Kimosabi said:

If we had a "Sound Monetary" system, there would be hardly any INFLATION because there is only so much gold and silver in the World.

It's a joke how the independant RBA controls both Money Supply and Interest Rates. While the RBA has this control of Inflation and Interest Rates they can manipulate Booms and Busts. It's also a joke how the Australian Population accepts this because of their ignorance.

Click to expand...

Why stop at gold and silver? Why not have nickel, copper and oil as reserves to base a currency on?

Gold and silver are pretty rocks, thats it. They have no underlying value beyond that prescribed by fiat - the same as paper currency.

The gold bugs could avoid the 'daily devalution' of their beloved currency by taking it from under their mattress and holding bonds or any other investment returning a greater return than inflation.

Sadly, gold pays no income; being only a pretty rock, it has no intrinsic value or return beyond that prescribed by speculators - the same as paper money.

Why is it a joke that the RBA sets rates? Would you prefer politicians implemented monetary policy?

The RBA sets interest rates by manipulating the money supply. After stating the cash rate target, they participate in the money markets to get the rate to match. The role of interest rate targetting and control of money supply cannot be seperated.

SMURF said:

Inflation is a result of an increase in the money supply.

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Not really. Inflation can be caused by increase in money supply, but only by way of the effect the increase in money supply has on demand in the economy. Inflation is a sign that activity is exceeding capacity.

The US is a great example.

They have injected excessive amounts of money into their economy over the last five years (wrongly in my view) but this has not necessarily been inflationary because the US had an enormous amount of excess capacity, productivity growth and imported deflation from the effects of globalisation.

Because we do not live in a closed system - inflation is created by many external factors also.

Therein lies my original point. I am getting the feeling that we are heading for higher inflation in Australia because:

1. We do not have a lot of excess capacity at the moment.

We have not spent money on training and infrastructure to allow for the expected increase in economic activity (external demand for commodities for instance) to persist without prices rising. We need to spend money on communications, roads, ports, training etc - but we have chosen to blow money on middle class welfare and 'investing' in renovating ugly federation style homes.

2. Domestic productivity growth has slowed considerably. This means the economy cannot grow at a faster clip without applying pressure on prices.

3. The deflationary effect of globalisation achieved over the last 20 years could be slowing over the coming decade.

Electronics cost the same or less than 15 years ago and are of far higher quality. Textiles are the same, clothes are the same price as decades before. Cars, appliances, furniture; all cheaper now than before but is this effect slowing as developing countries wages increase.

Now contemplate a sharp rise in the Yuan and the level of inflation we will import.

Finally, developing economy demand for energy and hard and soft commodities is inflating the basics, further spiking inflation.

SMURF said:

due to our collective short termism.

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I totally agree with this statement.

The sad thing is, when rates go up a couple of percent and the housing hoax ends in tears for many who simply wanted a place to live and not an 'investment opportunity'; the blame will be slated on whoever is in power at the time and not the parties that have allowed this short-termist thinking to prevail.

We have grown very accustomed to low inflation and the cheap debt this has allowed. Are we prepared to accept higher interest rates and the concept of easy money from leverage not working?

I don't think so.

numbercruncher said:

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I'll drink to that! errr.... but NOT from one of THOSE cans! ... lol

*Serious* - Todays news that house prices in Melbourne rose 19% in the last 12 months won't help the inflation scenario either...

thw commodities boom is no where near over it may have a couple years along the track with a slower pace but overall i believe its 10-20 year phase at least!

Why. China is in a process of rapid urabanisation they still have a loooong way to go with millions of people a year flocking to citys the infrastructure required is huge. This urbanisation will take many many years. We also have to remember that the worlds population is increasing exponentially (which i dont think can be sustained) by anyhow with 10 Bill people by 2020 i would say there will be more demand for food, energy and commodities.

Australia doesn't only export iron and copper we export LNG , coal and have the worlds biggest uranium reserves not to mention the biggest geothermal reserves. Because we have such cheap energy sources energy intensive operations such as aluminum production etc will stay here.

i dont know alot about the current account deficite but i believe many countires have them and the global trade imbalances are the main cause. So if we address the imbalances we address the CAD.

also with food price infation we are in the grips of a drought and droughts dont last forever one day (prob sooner rather than later) we will have a strong El nina and crops will flourish. El nina looks to be currently forming now and NSW is 75% drought effected not 95% like a couple years back

There's only one problem with the train of thought in this thread ..... it's focus is on inflation , which developes in it's own way , usually edged on by market forces and manufacturing/processing pass ons etc.

Being the uncontrolable beast that it is , perhaps first before we hunt it down , we should ascertain its species , size and power .

The first test shows that it is not the vanilla inflation we are so mind numbingly told of by every would be economist and market reader/analyst , it is in fact stagflation ...... a completely different animal than the one the smart money is hunting !

Whilst our dirt sales are going to hold the fort for a few more years , we will see higher prices evolve as demand soars higher throughtout the boom .

I heard many an analyst quote a 20 year boom guaranteed on the back of China , but I beg to differ , as China pushes it's way through to a net exporter , with a keen eye on India , we too will see our dirt sales take on a second innings , as China and India compete for further ore sales ,
The main winner would have to be coal by then , as costs will still be relatively cheaper for production methods used at present and don't look much like changing in the two above mentioned economies .

The key factor for any disruption would clearly be Taiwan , if China were to retake their province by force , the shock waves would be felt by every economy on the planet .Now to add flavour to a current dilema on oil , the gurus have set an inflation adjusted prices per barrel at $101 , dating back to 1971 , but true figures predating that little blip , have it at $116.85 ........
Now with CPI knocking the tiles of the roof , perhaps the focus should be defered to stagflationary pressures , which can lead on to either hyper-inflation , which smells close or puncture the waterbed and leak deflation everywhere ....... with the exporting help of Japan of course , it's not just cars they send off shore . An economic clash with China would force that issue further and make it a mandatory obligation for Japanese politicians to share the pain around globally , all with the colonizing help of the Yen .

Recent inflation has even spread to home appliances, one of the most oversupplied goods in China.

Haier, China's biggest appliance producers and an exporter of mini refrigerators and other appliances, said last week it will raise domestic prices of refrigerators and washing machines by 7% to 10% in response to higher producing costs.

The price rises are notable because winter is usually the slowest season for selling appliances, according to Citi's Xue, who added that it is "probably the first time in the past 15 years that we have seen price increases" in that sector.

Guangdong province, whose minimum wages will be the country's highest as of April, is China's largest manufacturing center for home appliances. That could put even more upward pressure on appliance prices.

It will be interesting if we ever do get to that point where the price of Chinese good really begins to accelerate - not just a few dollars, but 5-10% as discussed above.. or beyond. This can surely only be the start.. As well all know - the cost of coal, and iron ore has skyrocketed in recent months. It must only be a matter of time before these raw goods prices have to be passed on in the finished product.

The lowest common denominator for a long time has been cheap Chinese goods - driving out our own manufacturing industries, along with many others across the world. Most of these went years ago. There is not much to replace it.

Whether it be a washing machine, clothes, or even just a basic item such a fork - people are so used to getting these basic items at bottom prices, it's been allowing them to spend money on larger ticket items such as property or new cars.

Where does the RBA draws the line at interest rates? and when do things come back into equilibrium? People somehow think that inflation will one day suddenly come down, and so will interest rates - but it could be years until this point comes.

Higher commodity prices, comes back as higher goods and services = higher wages to compensate.

Which comes first, the higher wages or the higher goods and services? The grocer says he puts the prices up to pay the higher wages.The worker says he needs the higher wages because the price of goods and services are going up.What`s the problem here?Who is fooling who?

The President of the Victorian Farmers Federation, Simon Ramsay is calling for greater transparency in food pricing.

"Five per cent is an extreme percentage. we are finding mainly in the fresh vegetable area there are significant mark up between farmgate and shelf prices given there is little process between farmgate and the shelf you would wonder were those profits are going.

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WYSIWYG: Is it a chicken and egg problem?

That vicious cycle was targetted under the Howard govt ....WorkChoices etc - i.e. by linking wages to productivity. But hey, who can complain about Rudd and his superficial cliches, what a champion

AnDy62 said:

That vicious cycle was targetted under the Howard govt ....WorkChoices etc - i.e. by linking wages to productivity

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Just a shame he failed to spend the enormous surpluses on increasing productivity through infrastructure and education spending rather than on middle class welfare and vote buying.

I don't know if making teenagers work Sundays with no overtime was going to tame the inflation genie.

I don't disagree with your Rudd comments.