Saturday, August 18, 2012

Abbott could clean up. He could bet against the market on inflation

The Coalition's scare campaign about the impact of the carbon tax has failed to convince financial market traders who back their judgements with money.

Ahead of the introduction of the tax in July Opposition leader Tony Abbott claimed its impact on the cost of living would be “almost unimaginable.” His Treasury spokesman Joe Hockey said it would “drive up the price of everything." In contrast the government predicted a one-off boost in the consumer price index of 0.7 per cent in the September quarter followed by a 0.2 per cent boost in 2015-16.

In a Treasury research paper released Friday economists Will Devlin and Deepika Patwardhan use prices in the so-called inflation swaps market to derive the exectations of traders about the price impact of the tax.

Inflation swaps allow one trader to agree to pay another the inflation rate on specified sum in return for a price. It is worth $12 billion per year.

The research paper says inflation swaps pricing is a good guide to what the market actually thinks will happen because it "reflects the collective actions of actors who have to back their views by putting their money where their mouths are".

Their analysis finds the market expects a one-off jump in inflation of between 0.6 and 0.7 per cent followed by a return to the previous rate as forecast by the government.

It does not support the claims made by Coalition spokesman Greg Hunt that the price rises will “take time to flow through the economy,” or that “this is just the beginning as the Carbon Tax goes up every year”...

The first TD Securities Melbourne Institute inflation reading since the start of the tax in July showed a total price increase for the month of just 0.2 per cent, even after accounting for a jump in electricity prices of 14.9 per cent and a jump in household gas prices of 10.3 per cent.

The first Bureau of Statistics reading since the start of the tax will be available in October.

In today's Sydney Morning Herald

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