Tag Archives: Inflation

Where QE Has Taken Us

The Central Bank Conundrum

In the past week, Mario Draghi put through the policy of negative interest rates. He said the idea was to push savings out and into investment. This has had scribes scribbling around the world as to exactly what it means, but parsing through the writing it appears the most dreaded thing for central banks is asset deflation. It appears that we’ve hit a point in history where we just can’t let asset prices fall because too many things are tied into the prices as they stand, even if they are bubble prices. In other words, the whole Zero Interest – and now Negative Interest policy has been a desperate attempt to keep everything in their leveraged positions.

To this end, central banks around the world have been running what amounts to a price-keeping-operation, partly through printing money, partly through bluff, but also by buying equities. It turns out central banks have bought 29trillion in equities around the globe. ‘Abenomics’ in Japan has been running a gambit where pension funds have been buying equities at the behest of the government. 29 trillion is a lot of money when you consider the size of the US economy is 17trillion. No wonder investors around the world have looked at prices of shares and said a bust is due. Yet amazingly share prices of blue chips have kept soaring. Well,they would if Central Banks are buying them with printed money.

Now I’m not one of those people that bangs on about the failing of the fiat currency but any way you look at that situation and you have to ask, should equities be a one-way bet? But the Central Banks do this because they need share prices to stay high.

Zero Interest rates have been in place for many countries and the effect of that has been to amplify the carry trade where the US Dollar has surged out to ’emerging economies’ in search of yield as well as re-inflate the property bubble in places like California and London. Once again, asset prices are getting supported over just about any other consideration. So much so that a hypothetical interest rate rise of 0.5%would jeopardise US$13trillion worth of derivative products. Again, we’re not talking chump change here.

The problems of falling asset prices would be the banks being unable to cover all the positions. Take Deutsche Bank, which has  200trillion dollars worth of exposure to derivatives as an example. If asset prices deflate even a little, there will be massive movements in those derivatives and would easily wipe out Deutsche Bank. And if Deutsche Bank should fail, the fallout form that would be a whole bunch of banks going down with it.

And so we’re stuck with Central Banks busily trying to re-inflate asset prices whether they be shares or property or bonds. They’re printing money to do it, which means inflation is going on pretty hard out there somewhere. The proper analytical explanation of inflation is going to be too much money chasing around too few things. If you print enough money there are too few things by definition. If the printed money is then used to buy the share market, it seems the inflationary effect will be amplified. Similarly if money is  printed to buy the bad debt derivatives from the subprime loans crisis, there will be too much money chasing around too few proper investment vehicles. What happens i the things that are affected the most are not houses and fancy commodities but things like grain and foodstuff? Doesn’t that sort of destroy the purchasing power of people living in the third world? Won’t this bring massive social stability around the globe? And still the Central Bankers are trying to re-inflate the asset bubbles.

It’s not the speculation that is the problem; it’s the process of simultaneously destroying value while preserving prices.

When the GFC came about, there was much discussion about moral hazard and the US TARP bill which was an emergency loan to banks to shore up their bottom lines. We threw precaution to the wind and supported TARP because without it, our banking and our  superannuation accounts would have been shot. Since then banks have received the mos support from Central Banks in order to set their books straight. The bankers even drew up  Basel II and Basel III agreements so that banks could be held to a standard to lessen systemic risk – or so the argument went. And yet the net effect of all this has bee the destruction of the middle class in America (with the possibility looming for Australia yet), with the super-rich getting ever richer. The guy on Main Street got taught a lesson moral hazard at his own expense, after having his life savings taken hostage. The guy on Wall Street simply got a green light to continue doing the stupid things that got all of us into such a sticky strait.

So 6years-going-on-7, I think it’s a good time as any to ask just how well all of this is working out. The debt of the world combined sits at 720trillion dollars. The world economy combined is somewhere around 70trillion. We’re not easily going to pay off that mountain any time soon. That being the case you wonder how long the whole charade is going to go on. We might have kicked the can down the road nicely back in 2008, but we’re running out of road.

Discounting Inflation

One of the more pernicious things that has happened since sometime in the 1970s is that governments have changed the way they measure inflation. The net result of doing so has been to under-measure the real inflation out in the market place and claim inflation has been tamed. Again, this was particularly true in Clintonian America of the 1990s, where they invented some strange practices, which have since been adopted by the rest of the world as a ‘standard’. The basket of goods used to measure CPI has changed so much since the 1970s that it really bears no relationship to the figures that have come before. It’s been made to look more palatable by adding in luxury goods as well as items imported from overseas instead of items produced in the first world, which of course means we’re importing the deflationary pressure from the third world.

Obviously it works out much better for Central Banks and governments if they can turn around and point at lower inflation figures. The problem is that we are printing money in an awful hurry in many parts of the world, and at the same time China is running out of cheap labour which meas there won’t be a whole lot more deflationary force to be imported from China, the world’s second largest economy. In fact the Australian Financial Review had a headline in the last week saying just that; that the RBA has erred on the side of too low an official interest rate.

This is of course kind of ironic because on the one hand central banks the world over are fighting to have more inflation and no deflation on asset prices. If they simply went back to measuring the CPI the old way, they can probably see just how much inflation there exist sin the current system. Also, by under-measuring inflation, they’re setting themselves up for lower interest rates and thus looser monetary policy which of course does lead to more inflation. The longer the low interest rate regime runs, in a sense we’re making real a greater inflation without having the means to measure it. We’re already way too comfortable with the low interest rates. Even without the discussion on moral hazards, you’d think the central banks have got to figure they have one on their hands.

Leave a comment

Filed under General

The Money That’s Not There

Deficits? What Deficits?

A few weeks ago I made an observation over elsewhere on the interwebs which I forgot to note over here. Once upon a time in the 90’s when Pauline Hanson was a tyro crank politician, she was much ridiculed for her views. They were in most part totally outlandish and powered by a kind of backward looking xenophobia that made your skin crawl, but in particular she had a solution for Australia’s debt problem, which was “print more money.”

The press went to town on this statement as a clear indication that this would not work because printing money wold cause a massive outbreak of inflation; the likes of which crippled the Weimar Republic, so clearly this was a stupid idea born out of a stupid person. So the narrative went. And who amongst us who bothered to study modern history didn’t know of the crazy inflation that engulfed inter-war Germany as the Weimar Republic busily printed money to pay their reparations for World War I? Print money, you get Weimar Republic.

Fast forward 15 years and 5 years on from the GFC we find, in fact that is exactly the US Federal Reserve Bank is doing in its guise of Quantitative Easing, and even the Bank of Japan has joined the ranks of central banks ‘printing money’ with the celebrated ‘Abenomics’ in progress. The interesting thing is that inflation – the kind we read about in history books about the Weimar Republic – hasn’t exactly broken out in neither the USA nor Japan. In fact the Bank of Japan is running the printing presses much faster than the US Fed, and it might not make its inflation target of 2%. Go figure that one out.

No Inflation. All that money printed, and still no inflation. If anything central banks in the advanced economies are scared shitless of a collapse in asset prices.

I hate to say all this because I really dislike Pauline Hanson, but if the amount of deficit of the Australian Government was the size that it was – such that it could be paid off by the selling of assets under John Howard – maybe the Hanson plan of printing money back then might have been better? That way, the Federal Government, and by extension we the people would still have those assets.

Or maybe government debt isn’t as big a deal as the private sector is making out. What’s really bad about Greece and the other distressed euro economies probably is the fact that they can’t devalue their currency by printing their own money. But if we go by the – ahem, *gulp* – “Hansonomics”, Greece ought to quit the Euro zone and just print whatever money it likes to pay its freaking debts. And as crazy as that sounds to educated minds the evidence seems to be the case. Stick that into your objectivity pipe and smoke it.

This brings me to this article here.

In a 34-page review for clients of how a Coalition government might change economic management, Mr Eslake, chief Australian economist for Bank of America Merrill Lynch, also highlights the potential for “significant and ongoing tensions” in an Abbott government between its “genuine economic liberals”, such as shadow treasurer Joe Hockey, and those who are “more sceptical about markets … including in many cases Tony Abbott as Prime Minister”.

He predicts that the Coalition will ultimately adopt all of Labor’s proposed budget savings measures, except for ending the tax break for cars bought through salary sacrifice.

Even so, Mr Eslake estimates, the Coalition has so far committed to $28.4 billion of tax cuts and $14.8 billion on new spending in the next four years, a total of $43.25 billion. But he estimates the nine savings measures the Coalition has announced so far would save only $13.44 billion over the same period.

“By our reckoning, over the remainder of the election campaign, the Coalition needs to announce additional savings measures totally in the vicinity of $30 billion over the four years to 2016-17 in order to be able credibly to claim that it would produce better bottom line outcomes than those projected (by Treasury and the Department of Finance), he said.”

“That is a substantial sum, although it is considerably less than the $70 billion ‘black hole’ suggested by the government.”

And that ought to give you a bit of a scare. If the polls are to be believed the incoming Liberal National Coalition Government is selling itself on being fiscal hawks and that 30billion will come out of something somewhere along the way in a fit of austerity worship. I don’t know where it will come from, and by the sounds of it, neither does treasurer-to-be Jolly Joe Hockey, but knowing their political persuasion it’s likely to come out of welfare cheques and education budgets.

Yet in a bigger picture sense, all this pain it will inflict on millions of people will basically hurt the economy anyway while doing not much good. It’s almost enough for you to endorse Hansonomic Printing Presses and ask them to simply print the money to pay the freaking debt. It’s what grown up countries do.

Leave a comment

Filed under General

News That’s Fit To Punt – 23/Apr/2013

Why You Can’t Trust Inflation Figures

The curious case of mismatched experiences of inflation against the official figures has been something interesting for some time. Here’s an article that attempts to explain the gap.

The secret lies in the “basket” of goods and services the Bureau of Statistics uses to measure the consumer price index (CPI) each quarter.
About 40 per cent of the “basket” consists of tradables, goods that have prices determined on the world markets, such as clothing and electronics. The bureau deems goods as tradable if more than 10 per cent is exported or imported.

The other items are non-tradables – goods and services that have to be consumed where they are bought, such as rent, utilities, insurance and education.

“When you look at the path of tradables and non-tradables, what you see is the domestically generated prices in services have been growing much more strongly in the past five years than tradables prices,” JPMorgan economist Ben Jarman said.

One the one hand, non-tradable inflation – also known as domestic inflation – has remained over 3 per cent for the most of the past decade, while tradables have experienced deflation brought about by the strong Australian dollar, Commonwealth Bank chief economist Michael Blythe said about the “two-speed divide” in an economic note.

It’s been an interesting few years since the GFC. Australia has somehow managed to claw on to the asset price gains before the GFC in property, and regained much of the value in share markets. Unemployment hasn’t exactly exploded, but our productivity has caved in (more on that later). The problem of the mismatch then seems to come from the fact that our property bubble largely remains unpopped, and that we’re slowly grinding our way down so that the property values fall back in line with historic norms. This is possibly why the RBA remains steadfast in keeping rates higher. They’re looking to slow the rush to property as much as possible while the market readjusts.

Which leads me to this article here about the rising costs in Australia.

In the past 11 years Australia has become one of the most expensive places to live, costlier than New York, London, Frankfurt and Singapore on everything from five-star hotels, car rentals, public transport, a pint of beer, cigarettes, jeans and an iPhone.

The survey, compiled by Deutsche Bank on prices and price indices on a range of products collected largely from the internet, concludes the US is the cheapest developed country in the world and Australia and Japan two of the more expensive.

According to the survey, Sydney remains the most expensive place for a weekend away, almost double the cost of a weekend holiday in New York. To put it into perspective, New Zealand weekend getaways are 25 per cent cheaper than in New York.

Singapore-based Deutsche Bank global strategist Sanjeev Sanyal said the survey is a survey of prices and deliberately does not try to explain the data. It is more a case that the price comparisons speak for themselves and in Australia’s case it is massively more expensive on most goods and services. Like all surveys that compare prices, there will be some distortions but even if these are stripped out, a basic trend has been captured that is disturbing in a global context.

Australia is part of a global community operating in a competitive world. When prices are relatively higher than the rest of the world it raises questions about how we can compete and how do we become less expensive?

This is peculiar and interesting because if the first article tells us that inflation figures are somewhat distorted by the basket of goods used to measure the inflation, then the second article points out that it’s been going on for a long time – so much so that our situation is untenable.

The funny thing about markets is that if there’s a greater fool to pay the price for something, then there’s a market for that price. When you think about it, this greater fool philosophy has driven such things as Westfield rent price rises to Sydney property markets to prices of vintage cars and guitars and whatever else you can slap a price tag upon.

What we have in Australia and its pricing is the boiled frog effect where the gouge has been going on gradually for some time with little competition, to correct for the gouge, and now everybody is over-invested in the gouge growing because we think that’s economic growth. Except the problem is we’ve run out of greater fools to on-sell our gouge-prices and we’re wondering why we’re so damn expensive. We’ve been telling ourselves that the RBA has got inflation under control for some time, but clearly that’s been happening that way because the RBA is incentivised to under-report inflation so that they can look better. Then they complain about falling productivity.

More Taxes, Less Fun

Here’s the complimentary third piece of the day that’s worth a read and a think.

First, tax revenue has collapsed, and Treasury secretary Martin Parkinson warns that, on current settings, it will stay weak for years ahead. The high dollar has flattened profits or driven them down in much of the economy. Mining companies are making big profits, but they use depreciation deductions to write off their $284 billion of investment over the past decade against taxable income.

Second, Labor has introduced three big new fiscal commitments without the revenue to pay for them. The mining tax was meant to fund the government’s share of the increase in superannuation contributions from 9 per cent to 12 per cent, but that is now essentially unfunded. So is the commitment to $9.4 billion of new education spending from the Gonski report and so is the national disability insurance scheme.

Third, the pressures of an ageing society on the budget, which Treasury has warned of for years, are becoming real. The Howard government only intensified this with new entitlements for older Australians, and Labor has done too little to right the balance.

None of that is terribly ‘new’ news. It kind of suggests that Australia is one country that could afford to tax a bit more and work a little harder (“yes you, laddie!”). Sounds a bit like ‘austerity’ to me and of course we know austerity has lost credibility in the last few years. I would say that just because the argument for austerity in countries like Portugal, Ireland, Greece, Spain Cyprus and so on has turned out to be a crock, doesn’t mean it’s uncalled-for; it is possible that a little bit of austerity might do us a bit of good seeing that we haven’t done much in that way since the GFC came to roost.

Gold Crashes

Look, I don’t really have a great nugget of thought about gold prices crashing. Marcus Padley on the other hand has a good column here. There’s this really crucial bit I want to share with you all.

If you consider all the gold ever dug up forms an essentially static 20.4-metre by 20.4-metre by 20.4-metre cube, a cube that doesn’t change much in size, then you begin to realise all the price really reflects is what a herd of hot potato passers are prepared to pay today.

Meanwhile the cube just sits there not doing anything, returning nothing, while the herd goes stampeding around and on occasion having a ”freak out” as it did this week. It must wonder what all the fuss is about because even it, a large lump of brainless inert metal, knows nothing is really changing at all, except the fear, greed and delusion that controls the price.

So there isn’t much value you can add doing fundamental analysis on the gold price and a lot of the highbrow discussion is redundant because making money out of the current gold price collapse is going to be a function of technical rather than fundamental skills, in which case 90 per cent of you can simply ignore it.

The man is right on.

1 Comment

Filed under General

An Odd Phenomenon

The Inflation That Wasn’t There

I’m trying to wrap my head around how something like this can happen.

The IMF’s database shows goods and services costing $US100 ($A97) to produce in the US now cost $US41 to produce in India, $US67 in China, $US105 in Germany or Britain – but $US161 in Australia.
Only Norway and Switzerland are more expensive to do business, or spend money in. Since 2002, the dollar has turned Australia from a relatively low-wage, low-cost country to a high-income, high-cost one outpacing even Japan.

Here’s the graphic from the page:

To be frank, I just don’ get this. For the last decade, the Reserve Bank of Australia has been pretty rigid in insisting on sitting on the inflation rate, keeping it under 3%. To that end, they’ve run their interest rates up when the inflation figure hated up. During that 10year span, there were plenty of moments when they insisted the inflation rate was not so high even though cost of living figures kept coming in higher than the CPI.

So when you get to the bottom of the article you find that Taiwan has been printing its money furiously to keep their currency in line with China – to keep their labour force competitive – and somehow have experienced a price deflation.

This is really curious. The RBA didn’t print money, sat on the inflation rate hard, and somehow Australia’s index prices have inflated from 77 to 161. Taiwan printed money and somehow its index lowered from 62 to 52. I’m sure there’s a tricky economics answer in there somewhere, but if I were to swing my Occam’s Razor, I’d say the RBA has been getting their inflation figures totally wrong for a good decade and the net result is this rather nasty bit of price inflation. The article attributes the rise to the Australian Dollar, but this seems arse-about. The Australian Dollar is high because everybody else is furiously printing money and we are not.

It would also go some way toward explaining the elephant in the room, the property price bubble. Because the RBA kept reading the inflation to be much lower than it really was, it ran interest rates much lower than it should have, which resulted in too many people borrowing money to buy property, contributing to the bubble. So in that way, it can be understood that Australia did “print money” without actually printing the dollar bills. – we simply re-calibrated our property prices to being too expensive.

Which brings me to this other article today…

So Do We Re-Inflate The Bubble To Save The Government Now?

Here’s Michael Pascoe saying that he thinks Wayne Swan is betting on a housing recovery.

Treasury’s MYEFO forecasts for the 2013-14 domestic economy  make grim reading with predictions of flat or declining performances in all but two areas: dwellings investment and farm product.

It’s a very brave decision, Minister, to get into the long-range weather forecasting business, but that effectively is what Treasury is doing by predicting that farm product will rise by 6 per cent in 2013-14, an upgrade from a 1 per cent rise guessed in the May budget papers.
More important for the credibility of the government’s outlook is the belief that the housing industry will finally turn the corner.

Says Treasury: “Dwelling investment is forecast to be flat in 2012-13, before growing 4 per cent in 2013-14. Dwelling investment declined 3.3 per cent in 2011-12 on the back of continued weakness in the detached housing market. Conditions across the sector are expected to improve gradually over the remainder of 2012, consistent with the solid growth in dwelling approvals and commencements seen in the June quarter.

“The recovery is expected to gather momentum into 2013-14, driven by a pick-up in home buyer demand, improved affordability following declines in house prices over the past two years and the assumption that interest rates will remain below average across the forecast period.”
It’s only housing and farm product and what seems a marginal improvement in net exports that hope to maintain real GDP growth at 3 per cent next year.

This business of the diminishing tax revenue for the Government is pretty drastic. The ALP government is gunning for a surplus as the world economy slips back into a double dip recession, and the commodity price boom comes to a shuddering halt.

In the midst of all the financial problems of the world, Australia has somehow managed to dodge the most lethal bullets. That doesn’t make us bullet proof, as the world’s problems really have started to impact on our receipts.  There’s no telling how property prices could unravel if unemployment should go up; and nobody is saying it’s going to go down. The most recent report somewhere had it that 12.5% of mortgages were in negative equity – that’s 1 in 8 mortgages out there, which is no small number. 3% were in serious mortgage distress, if not defaulting. Property prices are still falling if anything – and the RBA wants it to be a slow deflation rather than a big bursting of the bubble.

So you have to wonder how on earth there can be a housing recovery if there are all these bad mortgages and distressed assets all over the place. A lot of people are going to have to swallow losses and be pushed to the wall before the sector can really  improve. I don’t think the RBA has the stomach for such an outcome – probably because all those bureaucrats have properties too and don’t want to take the loss. You can chalk that up to being a vested interest all of its own.

 

 

Leave a comment

Filed under General

News That’s Fit To Punt – 03/Apr/2012

O Woe Was Me?

They say the current unemployment in Australia sits at 5.2%. I don’t really know if this 5.2% figure is as solid as the kind of unemployment figures we used to have back in the late 1980s when unemployment perpetually seemed to sit at 8.5%. Youth unemployment in my youth regularly sat at 15%-17%, and you would see these figures in the news and you’d think, “wow, that’s a lot of people who are out of work.”

Those were the days. Of course, that gave way to the Howard government reorganising both welfare and the way in which unemployment was measured, resulting in the downward trend of these numbers in the years since.

Still, it turns out that Roy Morgan tracks unemployment figures in the old way, and they think the real figure sits at about 9.3%. Of course, the folks at Roy Morgan then go on to say it’s the IR  laws’ fault and the government needs to make things more flexible for employers to hire (and fire) people – because that’s exactly what the part-timers are looking for. They’re not the only people who see a problem with this figure.

In September, there were 85,100 who wanted to work and were looking for it but could not start within the survey week, so don’t fit the standard definition.

And there were another 1,216,700 who wanted to work but said they had not actively looked for work in the four weeks leading up to the call from the ABS.

The people in those two groups, just over 1.3 million, might be termed the non-unemployed jobless.

Combined with the officially unemployed, the number of jobless people who want to work is 1,934,400 – more than three times the number who fit the official definition of unemployment.

And they make up 14.4 per cent of an extended version of the labour force totalling 13.45 million.
It’s a lot more than 5.2 per cent.

So, as you can see, the ABS tells us that the unemployment figure might be as high as 14.4%.

Which got me to be thinking a few things. The first thing that popped int my head was the brazen crookedness of the politicians that figured out a way of making the unemployment figure look smaller than it really is, just so they can make out that they’ve actually done something positive when clearly, they haven’t.And there’s not a damn thing we can do about it except point it out and keep it in plain sight.

The second thing that pops into my head is how little thought has been given to what kind of workforce Australia should have in light of the post-industrial, late capitalist world we find ourselves in. The rapid expansion of the service sector in the last 20years coincides with the massive casualisation of the workforce. While politicians talk up increases in guaranteed superannuation, it sort of misses the point that the casualised part of the labour force and the self-employed are likely to forgo the benefits of superannuation. (If there’s actually been one big lie, it’s been superannuation, but that’s another topic for a gripe and a rant).

The third thing that popped int my head was, what the hell future governments are going to do when all these people hit retirement age? These people are most likely going to have massive shortfalls in their superannuation and suddenly the government is going to have to pay them a pension. Future governments are essentially going to be the victims of the predecessors who believed their own bogus figures and planned accordingly.

The fourth thing that occurred to me was that I was pondering all this in spite of having a job. I’m thinking about this because the world being what it is, my position is as precarious as any other person who is not locked in to institutions, government or the big end of town’s corporate bodies. So even if one has some kind of job or going concern, you have to think about this stuff.

The sneaking suspicion I have about how they re-jigged how they calculate unemployment (They keep telling us it’s to bring us in line with how the rest of the world does it) is that it’s a figure that is brandished at the unemployed to say, “look, you have no excuses, there are jobs out there so go get them!”; when in fact if the real unemployment is sitting between 9.3% and 14.4%, then the state of the economy is clearly and manifestly much worse than presented by those who would brandish the 5.2% figure. It was bad way back when; but things are arguably worse now than back then because the government is believing its own spin in the worst way.

And yet, it is remarkably like how they changed the way they calculate the CPI (again, to bring it in line with how the rest of the world does it) and magically the CPI comes in much lower than the actual cost of living. In both instances, with unemployment and inflation – it appears that governments around the world have invented a way of measuring such things in such a way as to make it seem much smaller.

Still, it’s a funny thing. If unemployment were higher than measured, the RBA would have to be lowering interest rates. If inflation was running higher than the current CPI measured, then the RBA would have to raise interest rates. For once, the RBA might be right in not doing anything, month after month. It is entirely possible that the margin that they are misreading both unemployment and inflation cancel each other out. I don’t know if that can be sustained, but right now, this seems to be the case. This contradiction might also be why the RBA has not made a movement in some months. The two speed economy is too divergent in both directions, that the RBA has no choice but to stay in the middle by doing nothing.

Do I Trust Julia Gillard?

I’m going to some focus group on Thursday night, presumably to be probed about keywords the government can use to woo me back to voting ALP. Maybe it’s the Liberal Party trying to figure out how to mount arguments that destroy the ALP’s chances. I don’t know and never will, but these things are always a it of fun.

As long time readers here know, my own views on the next Federal election are already fixed – I’m Don Quivote! – so I’m going to have a lot of fun giving these people a piece of my mind. My best advice to politicians at this point in time is “get a dog up ya’.” That goes equally to Obama and Romney as it does to Gillard and Abbott. “Get a dog up ya!”

Leave a comment

Filed under General

CPI And Cost Of Living Discrepancy

What To Make Of This

Just what good is the CPI – the ‘Consumer Price Index – as a measure of inflation when the cost of living surges ahead of the CPI? This is the question in this article here.

Soaring food and rent costs have seen the cost of living outpace inflation over the past year, adding to evidence that households are being squeezed, new figures show.

“Employee” households saw their cost of living shoot up 4.5 per cent in the year to June, driven by soaring increases in the cost for food, alcohol and rent, the Australian Bureau of Statistics said.

The ABS said those rises were “due to increases in mortgage interest charges, fruit, automotive fuel, tobacco, electricity and rents”.

The increase surpassed the 3.7 per cent rise in headline inflation over the year to June and comes as rising costs – combined with high debt levels for housing – have been blamed for Australia’s slowing economy. The Reserve Bank uses its own underlying gauges of inflation based on data supplied by the ABS when deciding interest rates.

Food costs for employee households increased 5.8 per cent over the year, the ABS said, while alcohol and tobacco prices rose 5.6 per cent in that time. Housing costs, which exclude real estate purchases, increased 5.8 per cent for employee households in the year.

Now, that actually does fall in line with my own experiences of late. That is to say, the day to day things the form the inelastic end of my needs have been creeping up in price, while the things I have a fair bit of elasticity in have been falling in price. So if the CPI is measuring a wider spectrum of goods and it is coming in lower than the cost of living figures, then that indicates there’s a bit of deflation going on at the bigger ticket end of the spectrum.

It’s hard to say just how much we should be encouraged by the prices of computers today compared to even 5 years ago, but there does seem to be a trend for the bigger ticket items to be sitting cheaper than they did before. It is taking some stupidly obstinate pricing practices in the retail sector to keep the pricing at the same level as before we hit 95cents and above against the US Dollar. Most of anything imported has come down in price.

One imagines it benefits the government coffers greatly for things to be indexed to CPI rather than cost of living; especially things like pension and welfare payments, but that’s basically the government making savings in a way that doesn’t show up as a cut in the budget. Similarly, the mortgagees benefit greatly because it tempers the degree by which the RBA raises the interest rates. So it’s a kind of passive transfer of wealth from the poor to the middle. Though saying that too loudly will get you labelled a crazy Marxist – or a gloating fascist.

 

 

Leave a comment

Filed under General