Thursday, April 29, 2010

The Reserve Bank wouldn't push up interest rates between the Henry Review and the Budget...


Would it? Would it?


What's up

Electricity + 15%
Water + 14%
Petrol + 9%
Beer + 6%
Rents +6%
Childcare + 6%
Health services + 6%
School fees + 5%

What's down

Electronic goods - 16%
Children's clothes - 5%

Source: ABS 6401.0


Resurgent inflation has reignited speculation about an interest rate hike at made next week's Reserve Bank board meeting.

At 2.9 per cent Australia's annual rate of inflation has climbed to its highest point in 15 months fed by rapidly rising prices for electricity, water, education and childcare.

Melbourne prices climbed the fastest in the nation in the first reading this year jumping 1.3 per cent in just three months, spurred on by an extraordinary 22 per cent jump in electricity tariffs.

The Bureau of Statistics says nationwide the price of electricity climbed 15 per cent in the year to march, the price of water 14 per cent, childcare and health services 6 per cent and school fees 5 per cent...

Also climbing fast were the price of beer and petrol, each up 6 per cent.

Offsetting the very rapidly rising prices of Australian-produced services were sharply falling prices for imported goods.

The price of childrens clothes has fallen 6 per cent and the reported price of computers and audio visual equipment 16 per cent after adjustments are made for improvements in the power of computers.

The Bureau does not publish the calculations it uses to arrive at these apparent price reductions and submissions to an internal inquiry have cast doubt on their relevance.

"What's important is that domestically-generated price pressures are strong," said RBC Capital Markets economist Su-Lin Ong. "The high dollar is helping out with imports, but it may not be enough to restrain overall price pressures."

The Reserve Bank's preferred measures of inflation, which exclude erratic price movements are close to 3 per cent, well above the Reserve Bank's forecast of 2.5 per cent for the middle of this year.

"This means there's a 'live' possibility of a rate rise Tuesday," said TD Securities economist Annette Beacher. "It'll be close but I think the Bank will lift its cash rate 0.25 points to 4.5 per cent, then pause before continuing to tighten to 5.25 per cent by year's end."

A further hike of 0.25 per cent would add another $48 to the monthly cost of repaying a $300,000 mortgage. A jump in the cash rate to 5.25 per cent by would add $196.

Weighing against a rate hike next week will be the financial crisis in Greece and the imminence of the May Budget due just one week later.

Prime Minister Kevin Rudd said Wednesday's downgrade of Greece's credit rating placed "at an absolute premium the importance of continued strong, sober economic management".

"What is sobering about the news from Europe is the fact that globally we are not out of the woods yet," he said.

Seperately released figures show that Australian wealth held in property, shares and other assets is again approaching record levels, with average wealth per person climbing to $253,000 - just $7500 below the all-time high reached before the financial crisis two years ago.

Calculations by Commonwealth Securities using Treasury data released yesterday show that in the December quarter wealth climbed 3.6 per cent, by almost $9000 per person. Wealth has rebounded 11 per cent in the past year.

"No wonder Aussie consumers are so chipper about life," said Commsec economist Craig James. "Thier wealth isn't far away from record highs. The share market has rebounded and home prices have made solid gains. But spending hasn't. Memories of the financial crisis seem hard to shake."

Published in today's SMH and Age 


Related Posts

. So you think you trust the Consumer Price Index?

. Does the Reserve Bank think the Consumer Price Index is a joke?

. The living cost index that won't index living costs


1 comments:

Alan Kerlin said...

Surely basing an interest rate decision on such rises would be counter-productive? So many of those items are inelastic demand commodities we have no choice about, rather than discretionary spending. And they would be heavily influenced by increased interest rates, thereby ensuring a rate rise resulted in further inflation.
This is a fatally flawed tool - fatal for those it sends broke before it finally results in the desired behaviour change among higher income households.

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