Thursday, April 28, 2011

Up, up, up with only the dollar holding prices back, back, back

Up, up, up in just three months

Bananas +100%
Vegetables +16%
Petrol +9%
Education +6%
Electricity +5%

Down, down, down for now:

Electronic goods -7%
Furniture -6%
Milk -6%
Linen -5%
Shoes -4%

The Queensland floods and cyclone and soaring international oil prices have pushed inflation to a height not topped the since the introduction of the goods and services tax, sparking talk of interest rate hikes and a fuelling a surge in the Australian dollar.

The Aussie hit a new post-float high of 108.5 US cents after the the March quarter update pushed the annual inflation rate to 3.3 per cent and the quarterly rate to a long-term high of 1.6 per cent.

The largest single contributor to the quarterly increase was a 9 per cent hike in the price of petrol. One quarter of the increase was due to skyrocketing fruit and vegetable prices propelled by a 100 per cent rise in the price of bananas and a 16 per cent rise in vegetable prices driven by flood-affected cauliflowers, broccoli, lettuce, pumpkins and potatoes.

“It’s not just bananas, and its been tough on family budgets,” said Treasurer Wayne Swan. “We can take some comfort however that in coming quarters some of these price increases will unwind as crops regrow.”

Some private sector economists disagreed with the Treasurer claiming the the full effect of the floods and cyclone was yet to be felt.

“Although food prices were up sharply, we think there will be a spill-over into the next quarter. Banana prices rose 700 per cent and this was only partly captured in the March quarter figure. Petrol prices rose over the quarter meaning the full effect will be felt next quarter,” said RBS Australia chief economist Kieran Davies.

“That said, food prices will fall sharply later in the year when farm production comes back on stream, meaning small or modest inflation outcomes in the last half of the year.”

Holding back what would otherwise have been even higher inflation were a 6 per cent dive in the price of milk driven by supermarket price wars, and the continuing rise in the Australian dollar...

Largely imported products such as electronic goods, furniture and shoes slid in price 7, 6 and 4 per cent.

“The decreases are essentially linked to the stronger Australian dollar, so if the dollar comes off then you are going to find higher petrol prices and higher costs across the board,” said shadow treasurer Joe Hockey.

Former Reserve Bank economist Paul Bloxham said the figures marked the beginning of an inflationary upswing.

“On a quarterly basis these figures are high however you cut them. The underlying inflation measures watched by the Bank come in at 0.8 and 0.9 per cent. Away from food and petrol it’s fairly broadly based.”

“If the Bank gets convinced inflation will be above target from here on there would be little reason not to hike rates sooner rather than later,” said Mr Bloxham, chief economist at HSBC Australia.

“I think the hike will be in July or August, but it would be wise to be vigilant for signs of an earlier move.”

Another Reserve Bank interest rise, the first this year, would bring the cash rate to 5 per cent and push most standard variable mortgage rates above 8 per cent adding a further $50 to the monthly cost of servicing a $300,000 mortgage.

Treasurer Wayne Swan agreed there was a risk of “emerging inflationary pressures”.
“Underlying inflation is under control, certainly,” he told The Age/Herald. “But there are emerging inflationary pressures in our economy if we don't get the settings right.”

“Taking the necessary decisions to get the budget back to surplus in 2012-13 as planned will ensure that we don't compound inevitable price pressures that will emerge when the mining investment boom hits top gear.”

Mr Bloxham said BHP’s announcement of a massive $48 billion iron ore project in the Pilbra on top of two giant coal seam methane projects in Queensland would highten labour market and wage pressures.

Published in today's SMH and Age

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