Dual economy's double bind
August 02, 2008
"We are, of course, fully aware of the possibility that people may fear that this temporary period of high inflation could, in fact, turn out to be persistent," ...Huh? If China's demand for oil and food is causing inflation here then can't we just slow China's growth by ceasing exports to them? So aren't these matters somewhat within our control? Can't we stuff the exports to China and go back to a one-speed economy? Aren't all the so-called gains of comparative advantage and economies-of-scale negated if we've hit the limits of supply of oil and food? Are pensioners struggling to afford food here because of our exports to China?
Australia is in the middle of its biggest export price boom since the Korean War, when the economy still rode the sheep's back and the price of wool jumped 140 per cent in nine months from mid-1950.
Such booms typically bust. And the inflation threat has been building for several years, obscured by cheap manufactured imports from China's low-cost factories, made even cheaper by a strengthening Australian dollar.
But a tipping point was reached last year and China switched from being a force for disinflation (through cheap manufactured imports) to a source of inflation (by pushing up global energy, steel and food prices). The Australian version of this global story contains an extra inflationary twist: the billions of dollars of national income from our commodity exports have pushed spending beyond the economy's supply capacity.
Now Stevens is deliberately squeezing the expendable domestic economy to make room for the unstoppable export-oriented resources boom to bring back demand within the economy's supply capacity. That shows up in the two-speed economy, with mining boom town Perth in the fast lane and Sydney's western suburbs' battler belt doing it tough. This week's figures showed that, while retail volumes have fallen during the year to June, export receipts are up nearly 30 per cent, producing a trade surplus. It's a volatile economic and political cocktail.
"There is a bit to be worried about," Treasury secretary and RBA board member Ken Henry warned just after the May federal budget in a speech devoted to defending the RBA's inflation target. "Present macro-economic circumstances are as testing as anything we've seen since the mid to late 1980s."
Everyone agrees with Henry that this is the biggest test yet of the inflation target regime, of which Australia was an early adopter and which now is the norm in most developed economies other than the US and Japan ...
While Hewson has been one vocal critic of Stevens's RBA, so has Peter Jonson, the RBA's head of economic research in the '80s, who writes under the pseudonym Henry Thornton. On Anzac Day, Jonson wrote in The Australian that "we may now be witnessing the death of inflation targeting", arguing that trying to keep overall inflation within or close to the 2 per cent to 3 per cent band in the face of surging oil and food prices from abroad would risk throwing the economy into an unnecessary recession ...
Pointing to "sky-high global oil prices", Swan says the Government can "deal (only) with those matters within our control". "It is certainly going to take a significant amount of time to deal with the inflationary pressures in the Australian economy that have been developing for a long period," he says.
Forces conspire to lift grocery prices
July 26, 2008
But it is not only petrol that is jacking up the cost of everything from bricks to bagels.Can't we help return these upwardly mobile Asians back to their peasant life by stopping exports of minerals and food to them? Ploise uxplain ...
Creeping interest rates, the drought, a global food shortage and upwardly mobile Asians hungry for Western foods and fads all are feeding into Australia's spiralling cost of living. Kevin Rudd chose three f-words to sum up the global inflation situation this week: food, fuel and finance.