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Jul 28

Inflation Up? Not really just interest rate rise panic

The above chart has been copied from www.rba.gov.au and  shows annual CPI change over the last 16 quarters and guess what? The latest quarter’s figure, excluding volatile items is 2.5%! Right in the middle of the RBA’s inflation target of 2% to 3%.

When the Reserve Bank looks at inflation they do not, or should not, consider volatile items such as food and energy. Why? because these items go up and down in price thanks to global markets, weather events, Middle East tensions, and the Reserve Bank’s actions will have little impact on their price. Certainly, after the weather events we have seen locally at the start of the year, food prices (which are a large part of anyone’s budget) have increased and next season prices are bound to revert to normal.

Because of these “cost-push” issues (tha also include health insurers increasing premiums, high petrol prices, etc) we all have less to pay for the more discretionary items and that is why retailers are struggling (NOT because of internet purchasing alone) and why the true core inflation is actually under control at 2.5%. “Demand-pull” inflation does not appear to be an issue and when you throw in the potentially catastrophic global financial issues in Euro and USA (neither of which are anywhere near fully resolved), I don’t believe the Reserve Bank will or should increase interest rates for some time yet….and the market agrees…why? interest rates are quite low…see below chart.

Australian Government Bond Yields – 28 July 2011

Source: Bloomberg

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