Inflation has gone up: that is bad news, and I don’t just mean because prices are higher.

Prices rose by 3 per cent on average in the last year, their highest rate of change for several years.

Inflation

The RBA wants inflation to be between 2 per cent and 3 per cent. If inflation gets above 3 per cent, it will generally lift the official cash interest rate to keep inflation down. [for a nice simple explainer on how and why the RBA does what it does, follow this link.]

Inflation and interest rates

Higher interest rates make it harder to do business. If the RBA lifts interest rates now, while unemployment is at its highest level in years, the improvement in the labour market might slow down.

unemployment

Basically, the RBA is in a pickle. It is an “inflation-targeting” bank. Our entire economy hinges on the idea that lower interest rates create both growth and inflation. If they only create inflation, then we are stuffed.

It nervously awaits the next release of inflation data (in 3 months time) and the next release of unemployment data (on August 7th). We should all be on the edge of our seats.

n.b. the fact that the red line is below the blue line in the graph above means we have negative real official interest rates! The fact that money is losing value should be enough to get people spending it.

 

 

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

2 thoughts on “Inflation has gone up: that is bad news, and I don’t just mean because prices are higher.”

  1. IMHO monetarism has been seriously oversold and is more or less useless when it comes to avoiding crisis. The tragedy of the Australian economy is that it is failing to invest in future industries and jobs and it has no framework to make this happen and what little it does have is being actively destroyed or being left to whither – in short directionless and incompetence rule.

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    1. To my mind the jury is out. If we can avoid a major bubble issuing from all this QE, then I am all for monetary policy being a big thing. If we get a bubble and bust then monetary policy was always a bad idea.

      This fence-sitting attitude is one of the best things about being on the sidelines looking in!

      As for investment in Australian industries, I’d like to see a lot more investment in science. I still reckon we can have a dozen companies like CSL doing top-end research and high quality manufacturing in this country.

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