Australia | Oct 03 2008
By Greg Peel
Following on from yesterday’s assessment from TD Securities’ senior strategist Joshua Williamson that Australia still faces a serious inflation problem (“Home Owners Set To Be Disappointed”; Economics; 02/10/08), the TD Securities-Melbourne Institute monthly inflation gauge for September has done little to dispel Williamson’s concerns.
As we have watched the Australian economy slow and US dollar oil fall 40% from its highs one might have expected inflation would have begun to abate in Australia, but that is clearly not the case. The TD-MI gauge showed an increase of 0.4% in September following a 0.1% rise in August and a 0.4% rise in July, the latter being prior to the oil price’s significant fall.
The gauge now puts annual inflation at 4.5%, up from 4.2% in August. On the TD-MI measure Australia’s annual inflation rate has now sat above 4.0% for eight months and above 3.0% for thirteen months. The Reserve Bank of Australia’s target for inflation is 2-3%, which now seems but a distant memory.
Ironically, automotive fuel was a significant contributor to September’s rise, along with fruit and vegetables. Take these out and the gauge rose 0.3% in September compared to 0.6% in August. That seems more comforting, but the reality is there was no relief from a falling oil price because the Australian dollar has also crashed from its highs, offering no marked relief at the bowser.
A falling Aussie assists in reducing domestic demand for imported goods, but at the same time it increases international demand for domestic export products.
It was with this in mind that economists viewed with astonishment yesterday’s release of the August balance of trade. August provided a surplus of $1364m which was a turnaround of $2061m from a poor July. Economists had expected a surplus of only $200m and so subsequently they all fell out of their chairs on the announcement.
The most astonishing factor is that the Aussie was still entrenched in the 90s to the US dollar in August and the competitive benefits of the fall to under 80 this month will be felt in the next set of monthly data. From an economic point of view, this is great news for Australia. As the world economy weakens the argument from politicians that we remain strong is a viable one on these numbers. Viable, at least, until global demand seriously falls.
That might be the good news, but the bad news is that a strong terms of trade is exactly what the RBA fears most in the inflation-fighting War Room. The point of raising the cash rate to 7.25% this year was to reduce domestic demand. The terms of trade represents international demand for our products, but the income derived then makes its way into the domestic purse, encouraging further spending.
Throw in the $20bn of infrastructure spending the federal government yesterday pledged to bring forward to help stem Australia’s slowing economy, and what we have is little encouragement for inflation to fall. And the RBA very much wants inflation to start showing signs of easing soon, or otherwise the central bank fears it may lose control. The European Central Bank’s president Jean-Claude Trichet voiced the same concern last night.
Both the balance of trade and TD-MI inflation gauge figures (and the RBA always keeps an eye on the gauge even though it is not an official measure) gives further weight to Williamson’s and others’ belief that we will only see a 25 point rate cut next week, not a 50 point cut as hoped. The RBA may even cut by 25 with some degree of reluctance, but the counter for monetary policy is that Australian credit availability has become extremely tight as all the world’s credit markets remain in a veritable freeze, threatening an even sharper drop in domestic economic activity.