Wednesday, January 23, 2008

Briefing: The worst inflation result in 16 years

The worst inflation result for 16 years dented Australia's share market recovery yesterday and added to pressure for an February interest rate rise.

Australia's underlying rates of inflation – the ones watched by the Reserve Bank – surged to 3.4 and 3.8 per cent in the year to December, heights not seen since the last recession in 1991.

But whereas in 1991 inflation was falling, it is now climbing into territory well beyond the Reserve Bank's 2 to 3 per cent target.

Noting that the former Treasurer Peter Costello had said mid-last year that “inflation is right where we want it” the new Treasurer Wayne Swan yesterday produced a graph to show that at that time the pressures were building.

“For two years underlying inflation has been building. This data is proof that elevated inflation is the Liberal Party’s parting gift to the Australian people and Australian families,” he said...

“There is no point in trying to sugar-coat this. We were constantly out there saying that the previous Government had been ignoring warnings from the Reserve Bank about capacity constraints. You might recall the Government went on a spending spree during the campaign.”

The Treasurer again committed himself to bring in a budget surplus of 1.5 per cent of GDP but stressed that this was a minimum commitment and that the actual surplus might be higher, subject to international economic developments.

He said the Finance Minister Lindsay Tanner would be outlining the nature of the spending cuts “on a different occasion not be too distant from now.”

Mr Swan yesterday discussed the inflation outlook with both the head of his department Ken Henry and the Governor of the Reserve Bank Glenn Stevens and declared that while “nobody out there wants interest rate rises” the decision was one for the Bank to make by itself.

Australia's quarterly rates of underlying inflation came in at 1.0 and 1.1 per cent, well above the Reserve Bank's trigger level of 0.7 per cent.

The annual headline rate of inflation was 3.0 per cent, right at the top of the Bank's target zone.

Canberra prices grew faster, growing by 3.3 per cent, a rate exceeded only in Brisbane.

Among the Canberra prices to climb sharply were rents, up 7 per cent over the year; electricity charges up 18 per cent, water charges up 9 per cent and take away food up 5.7 per cent.

Petrol prices grew strongly in the December quarter, climbing 7.3 per cent, roughly offsetting the effect of a fall in the price of fruit and vegetable prices of 10 per cent.

The news reversed what had been a solid recovery in the Australian share market when it was released at 11.30am yesterday knocking 1 per cent of what had been a 6 per cent recovery in prices.

The All Ordinaries index closed up 4.3 per cent or 224 points at 5,446 - its first gain after twelve straight days of losses.

US shares steadied on Tuesday night after the Federal Reserve announced an emergency rate cut of 0.75 per and held out the prospect of more cuts to follow.

Mr Swan said he welcomed the move and its initial beneficial impact on the Australian share market.

But he said Asian growth would help Australia withstand the fallout from the US whatever happened.

Opinion on financial markets is evenly divided about whether Australia's Reserve Bank will push interest rates in February or hold off because of the US crisis.

The Bank is thought to be loathe to move amid financial turmoil, but Joshua Williamson of TD Securities said that not to act would be to risk more extreme action down the track.