The inflation that stops a nation

By Andrew Pegler 30/10/2009

During a week when a race stops a nation I thought it appropriate we break out the champagne, don the fascinator and head trackside to watch the inflation race build speed.

Right now the field is tight and the bookies are stumped. Inflation is still boxed in on the rails but it’s itching to break out as bank lending, production prices, house prices and CPI all start their run. Horse whispering RBA governor Glenn Stevens has suitably handicapped the field with his monetary policy whip, helped by the influx of cheap imports care of the high $AUD and the dampening effect of low oil prices.

So to the form guide in this week’s Inflation Stakes…

Last month’s data from the Housing Industry Association revealed the number of new homes sold jumped to highs not seen since 2006 as a flood of first home buyers joined the property race. With that form you can expect September to follow suit as house prices continue their climb.

Bank lending is the main driver for creating new money in the economy and hence inflation and it’s also on the rise. With the economy bouncing back business is throwing off the shackles of the recession we never had and looking for money. This has the Big Four competing aggressively to drive down costs and win business.

Meanwhile after six months of falling producer prices – an indicator of price trends and pressures on business costs and prices – September prices rose thanks to domestic price pressures on business and industry. This adds credence to the belief Glen Stevens has backed the right horse in putting up rates to combat emerging inflationary pressures.

Finally consumer prices in Australia jumped in the three months to September led by energy and water costs. Consumer price index, or CPI, came in a tad stronger than expected at 1%, giving an annual rate of 1.2%. Rising CPI is a key factor for the RBA when it sets official rates so this will not be welcomed by borrowers. I reckon a 0.25% rate rise on Melbourne Cup Day would be a good bet.

While the inflation stakes is an evenly rated race right now, there’s a ways to go. This is no regional race meeting over 1500 metres; it’s more like a Melbourne Cup over 3200 metres. Keeping the inflation fillies boxed in on the rails needs a long-term strategy that artfully mixes monetary policy with the impact of the high $AUD. Let’s hope Glen Stevens backs the right horse eh?

In other news… The Economist predicts that in 2009 emerging economies will attract more direct foreign investment than developed ones for the first time: “Flows to poorer economies, especially Asian ones, are proving more resilient than flows to rich economies which are suffering the worst recession in several decades.” Is this further proof of the seismic, unstoppable shift of wealth from western industrialised nations to emerging economies? Rio internship or Shanghai MBA anyone?