Interest Rate Hike Likely as Inflation Hits Food, Petrol Prices

Reddit

If people vote with their pocketbooks, and their pocketbooks are considerably lighter come a November interest rate rise…well…you do the math.

Higher interest rates hit people where it hurts…right down on the bottom line. But yesterday’s data from the Australian Bureau of Statistics suggests that the Reserve Bank is highly likely to raise interest rates again to try and cool the Aussie economy down. When inflation rises at the fastest clip in 16 years, what else can be done?

According to the Associated Press, “The weighted median measure, which strips out the most volatile price changes and measures underlying inflation, rose 3.1 percent from a year ago and 1 percent from the previous quarter.” It was another new high of sorts.

That’s saying something. Official measures of inflation tend to strip out precisely those things going up in price, as if it were more accurate. But a closer look at the ABS data shows that credit, energy, and fuel, and food are all getting more expensive in Australia.

Here’s how the ABS put it in its release, “Significant contributors to the increase this quarter were fruit (+9.6%), vegetables (+7.9%), deposit and loan facilities (+2.2%), rents (+1.6%), other financial services (+2.3%), house purchase (+1.0%), electricity (+4.3%), overseas holiday travel and accommodation (+4.2%), property rates and charges (+4.5%), water and sewerage (+5.5%), domestic holiday travel and accommodation (+1.8%) and other motoring charges (+2.6%).”

The Aussie dollar immediately rallied on the news, anticipating a higher yield spread between itself and the Japanese yen and the US dollar. This is one of the major components of Aussie dollar strength- the yield differential. The others are the commodity bull market, which creates demand for Aussie dollars, and the government’s surplus, which compared to the fiscal policy of other Anglo Saxon countries, looks downright prudent.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
Reddit

Comments

  1. My children hear me complaining about petrol and grocery prices they hear the new talk about interest rates but they think why I should care? They don’t understand that if nothing is done now it will be worse for them

    Karry Smith
    April 6, 2008
    Reply
  2. High inflation is fine as long as your wages rise higher. Ensure you aggressively persue payrises and dont ever let your boss tell you that they cant afford it. You can’t afford to NOT have it, and given the skills shortage happening, if you’re not happy with what you’re being paid, move to another job where they will play ball.

    Dont be caught on the wrong end of inflation when employment conditions favor the employee like they do now.

    Unpopular Truth
    April 8, 2008
    Reply
  3. What about when you have to push a wheelbarrow full of cash to the store just to buy a loaf of bread? Wouldn’t that be a big pain in the arse?

    Reply
  4. Unpopular,

    High inflation is a tax which transfers a claim on goods/services from the people to the government. However, it is a fairly hidden tax, which makes it the most dangerous.

    Furthermore, inflation doesn’t affect all prices equally, and those to get the newly created money first are the ones who benefit the most (because prices have not risen yet, thus the money is worth more). Those who get the money last are the ones hurt (usually workers) because by then prices have already risen beforehand.

    Additionally, inflation causes instability in the economy, especially when it is coupled with interest-rate-fixing, as this creates a misallocation of resources (aka bubbles).

    So as you can see, even if your wages rise with inflation, it is not fine.

    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au