Thursday, July 28, 2011

Inflation is baaaaack! Or so it seems. And the dollar....

The Aussie dollar has hit a new post-float high and was last night on track to pass 111 US cents after dramatically worse than expected inflation figures brought forward the prospect of one or more interest rates hikes.

Ahead of the Reserve Bank board meeting due Tuesday the Bureau of Statistics reported inflation had hit 3.6 per cent - well above the Reserve Bank’s target band of 2 to 3 per cent and the highest rate for 10 quarters.

Fruit prices soared a further 27 per cent in the quarter sparked by a further 138 per cent jump price of bananas. The Bureau says since January’s cyclone fruit prices have more than doubled and banana prices have jumped 470 per cent.

The consumer price index is not adjusted to exclude big price rises and so fully reflects the extreme jump in the banana price of bananas. Had fruit prices not risen the inflation rate would have been 0.2 percentage points lower.

Prices rose in all but two of the Bureau’s 11 categories led by shoes and clothing where prices jumped 2.5 per cent as retailers unwound discounts.

“Inflation is strong no matter how you cut the numbers,” said HSBC chief economist Paul Bloxham. “The next move in rates is up. I don’t expect the Bank to wait long.”

ANZ chief economist Warren Hogan said the result could not be dismissed as a rogue number.

“Underlying inflation is running at annualised pace of 3.4 per cent. We are entering the economic upturn at an already uncomfortable stage of the inflation cycle. An interest rate hike before year’s end is now clearly a high probability"...

Jarrod Kerr, Credit Suisse
A 0.25 per cent hike would push the variable mortgage rates charged by the biggest banks above 8 per cent. It would add around $50 to the monthly cost of servicing a $300,000 loan.

Westpac, which this month set itself apart from the market by forecasting a series of four rate cuts, stood by that forecast last night.

“Absolutely,” said chief economist Bill Evans. “The inflation figure was distorted by an unusual reading on financial prices. We are also asked to believe the prices of discretionary goods took off If they did they will fall back. Consumers aren’t buying. The Bank will start cutting rates late this year or early next.”

As if to emphasise the two-speed nature of the economy this morning’s Deloitte Access Investment Monitor identifies a record $832 billion of projects underway or at an advanced stage of planning - an 8 per cent increase on the March quarter.

Western Australia and Queensland between them account for more than half the spending, spearheaded by the giant $16 billion liquefied natural gas project at Gladstone in Queensland and Shell’s $9 billion LNG project in Western Australia, the world’s first floating LNG platform.

Access Economics says the national broadband network is also part of the boom, adding $3 billion to projected investment in 2011-12.

Treasurer Wayne Swan welcomed the “huge pipeline of investment” but said the resurgence of inflation was due to the “massive destruction to crops” caused by Cyclone Yasi and the summer floods.

Shadow treasurer Joe Hockey dismissed the floods as an excuse.

“They put their hands in the air and blame some natural disaster,” he said. “It’s their own actions.”

Mr Swan was incensed, saying as a proud Queenslander he found Mr Hockey’s reference to “some natural disaster” nothing short of offensive. “This is the same shadow treasurer who described the global financial crisis as a hiccup - just one of a litany of reasons why he is so clearly not up to the job,” he said.

The higher dollar was “a mixed blessing” for industry.

“We all benefit in the end from a high dollar, but on the way through there are sectors which are impacted and some are impacted harshly,” Mr Swan said.

Australian Industry Group chief Heather Ridout said important employers were being hurt “while seeing limited benefits from the big investments in the minerals sector”.

Published in today's SMH and Age

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