Australia | Jul 28 2006
By Rudi Filapek-Vandyck
Amidst all the fuss about whether Australia’s latest inflation surprises are solely the result of a short term shortage in bananas and the much debated oil problem, one element has been seemingly completely forgotten: the international export of Chinese deflation.
How high would interest rates be without the China effect today? Hmm. What we do know is that global economic growth would not be in its present state without China, and that includes current inflation and interest rates.
The matter will become a focus point at one stage, one would assume, as China is widely expected to start increasing prices, so the effect will diminish and probably reverse from now on (no consensus on this amongst economists though).
Anyway, why am I writing all this? TD Securities chief economist Stephen Koukoulas has taken the effort to look into the China effect, and just to prove my point, his calculations show inflation in Australia would not be at 4% but at 5.2% if it were not for the China-effect.
To make matters a little more complicated though, Koukoulas acknowledges the China-effect also includes a higher oil price, not just lower consumer prices for stereo’s, shoes and computers.
Koukoulas has tried to take it all into one more accurate China-all-included calculation and the result is that headline inflation in Australia would now be at 3.5% annualised, without the China-effects.
We leave the closing comments to the man himself: "This is probably a fair measure of the current inflation problem in Australia. It is why the RBA will hike interest rates for a seventh time on 2 August, it is why there is a strong likelihood of an eighth rise before the end of 2006 and unless we see general inflation pressures ease in the next three to six months, there is a risk that the RBA will need to hike interest rates a ninth time to 6.5% in the early months of 2007."