Drum Piece and Inflation

11:15 PM | Labels: Australian politics, Economy, Interest rates, The Drum

My latest Drum piece is here. It has no graphs but lots of depressing cynicism. Enjoy Smile

Incidentally in it I quote that the $1.5 billion figure the Government is claiming as the cost of switching to $1 bet limits comes from the Productivity Commission Report. I should have made more clear that it is cited in the report but is the PC quoting a submission by the Gaming Technologies Association, so I would regard is with about 1.5 billion tonnes of salt. My points, the PC even knew about that large figure and still recommended moving to $1 bet limits. The Australia Institute, meanwhile puts the figure at a rather more friendly $350 million.

The CPI figures were announced today. Here’s the guts of it via the ABS:

THE ALL GROUPS CPI

was unchanged in the December quarter 2011, compared with a rise of 0.6% in the September quarter 2011.
rose 3.1% through the year to the December quarter 2011, compared with a rise of 3.5% through the year to the September quarter 2011.

OVERVIEW OF CPI MOVEMENTS

The most significant price rises this quarter were for domestic holiday travel and accommodation (+7.3%), rents (+1.0%), telecommunication equipment and services (+1.1%), beer (+1.2%) and automotive fuel (+0.7%).
The most significant price falls this quarter were for fruit (–13.4%), pharmaceutical products (–5.6%), vegetables (–5.0%), audio, visual and computing equipment (–3.4%), international holiday travel and accommodation (–1.9%) and motor vehicles (–1.2%).

If we look at the all-important for interest rates trimmed mean, the rate is at 2.6%.

Let’s have a look at a few graphs (of course!)

There is hardly a more stark graph to show how our economy has changed since 1990. Of course inflation is only one side. Let’s have a look at inflation and unemployment over that same period

Again you can see how during the 1980 when unemployment began to fall, inflation would as well, before going back up. What happened in 1995-96 is that after the recovery from the 1990s recession, inflation stayed down, and unemployment kept coming down. Praise whoever you want – Hawke, Keating, Howard. Praise them all, because all of the things in the 1980s and early 1990s that caused a hell of a lot of upheaval sure as hell bore fruit in the later 1990s and most of the 2000s. Is life perfect? Hell no. But on a macroeconomic scale, the differences is stark.

Now given the link with changes in inflation and the cash rate (and vice versa) I though it might be interesting to look at the gap between the cash rate and the Trimmed mean

It gives a good idea of when the RBA is trying to pump the economy, and when it is putting on the breaks. You can see in 2000-2001 the gap closed as the RBA dropped the cash rate by 2% from 6.25 to 4.25. You can also see during the GFC how the RBA plunged rates relative to the inflation to a point where the cash rate was actually lower than the inflation rate.

The actions of the RBA become more clear when we look at this cash rate-inflation gap since 2000 with unemployment at the same time:

While not an exact mirror image it is pretty close.

In 2000-2002 the cash-rate/inflation rate gap dropped 3%, and unemployment went up 1%. During the GFC the gap dropped almost 4% and unemployment went up nearly 2%. What this suggests to me is that if the RBA believes the international conditions are such that unemployment will go up (and some pessimists are suggesting it could rise to 6%) expect the RBA to drop the cash rate to a point where it is about 0.5% above the inflation rate. That would mean a drop in the cash rate from the current 4.25% to around 3.0% – 2.35% – especially if they believe (as their GFC actions seem to suggest they do) that going in early is better than waiting if the economy looks to be stalling.

In other news – in his speech today Anthony Albanese plagiarised lines from The American President. I missed it because I was (ironically) watching the State of the Union speech given by the current American President. The Liberal party quickly got a video out on it:

I think whoever wrote that speech should be shown the door. Plagiarism – especially of such a well known movie – is an unforgiveable sin in a speech writer (or any writer for that matter). It makes Albo look a buffoon, and it will plague him when he attacks the Opposition in censure motions.

To whoever wrote it, you should have noted the final line of the speech in the movie:

“This is a time for serious people… and your fifteen minutes are up.”

As Possum said on Twitter: