Wage Pressure in China to Drive Up Cost of Goods in Australia


Last week we speculated that central banks have a lot less control over the real economy than they used to… in the good old days before globalisation. This week we’ll find out how true that is. We’ll find out how fast producer prices grew in the first quarter today. And on Wednesday, we’ll find out how fast consumer prices rose.

Our forecast? Fast! We base that solely on beer prices for mid-strength beer at the MCG for Saturday’s Collingwood-North Melbourne footy match.

It depends on how you measure these things. If you exclude the items like food and fuel and rent and health care, then prices probably aren’t rising so fast. For some items, consumer electronics for example, prices appear to be flat or falling.

But even this pleasant trend may not last forever. One aspect of China’s mega-boom is that wage pressures in China may finally be driving up the price of Chinese exports… and signaling an end to the long period of disinflation in manufactured goods. Your white goods may start to get more expensive.

But who knows? That is the one element we neglected to include in our analysis of the Aussie-China relationship last week. Both economies are running at near capacity. On the Chinese side, that should raise the price of Chinese exports to Australia over time. On the Aussie side, the commodity boom may run straight into the limits of Australia’s work force. All hands are already on deck, and it’s not nearly enough to meet demand.

In any event, what do you reckon the Reserve Bank will be looking for? It knows the consumer prices are rising by 3-4%. This is well outside of its comfort zone. But it also knows that its seven rate rises since May 2006 (boosting the cash rate from 5.25% to 5.75%) should lead to slower credit growth for businesses and consumers this year.

The RBA will probably wait for more data. And barring a major drop in prices, we reckon the cash rate isn’t going anywhere for the rest of the year. It can make itself comfortable on the couch and stay up late at night to watch channel Ten’s coverage of the IPL cricket.

Looking for your chart fix? We sat down with Gabriel Andre and Al Robinson at Money Morning to reach a compromise last week. Gabriel is going to do his charting work there, where there is more space, and frankly, more focus on the data and day-to-day movements of the market.

Beginning this week, he’ll devote one day a week to the following areas: Currency and commodity markets, global indices, Aussie indices, Aussie sectors, and individual share price charts. It’s not a fixed playbook. After all, the market changes. But we’ll keep you updated on what he’s up to from time to time.

Well the 2020 summit has come and gone and sadly, we missed the whole thing. We did read in today’s FT that Victoria has a big new solar project. “The 154MW scheme, located in the south-eastern state of Victoria, would have nearly twice the capacity of the biggest existing solar power plant, in California’s Mojave desert,” reports Robin Kwong.

“The project, which is scheduled to be completed in 2013 would generate enough electricity to power 45,000 homes. However, that is equivalent to only about 0.1 per cent of Australia’s electricity generation in 2006.”

It’s a start. But you can see the challenges ahead. We continue to believe the energy problem is not going to be solved at all. Instead, it requires a portfolio of energy solutions that include individual homes and businesses generating power they can sell back to the grid.

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.

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