What has inflation got to do with the price of fish?

Posted July 2009

Well quite a lot actually but more on that later.

As some of you may already have read, Australia just recorded its lowest annual inflation rate since the end of 1999 and it’s the first time it’s gone below 2% annually since 2007. By way of background, inflation is measured by the Consumer Price Index, which measures the quarterly changes in the price of things – if prices inflate, go up or deflate, go down. The Australian Bureau of Statistics (ABS) works out the CPI by quite literally measuring the price of a ‘basket’ of the goods and services we buy the most of like, petrol, food, clothes, shoes, education, phone bills and beer (or a crisp chardonnay if that’s your tipple.) For the record the biggest rises over the quarter were for petrol (3.6%), hospital and medical services (3.6%), rent (1.4%), furniture (3.7%) and house purchases (0.8%).

So all this means that the price of fish will stay pretty much the same (as with oysters or even abalone).

And now to the elephant in the room – how does all this affect interest rates? According the minutes of the Reserve Bank’s July board meeting, our central bank reckons inflation will keep low for quite a while yet so it’s going to keep interest rates low too. In fact the bank feels that with all this great inflation news it may even need to drop rates a tad more. FYI the Reserve Bank raises interest rates when inflation goes up to slow down the economy so things don’t get too crazy. In other words, when rates are high people can’t, or don’t, borrow as much, so there’s less money in the economy and therefore less is spent on goods and services, which drives down prices – deflation.

The minutes of the meeting also revealed that, between tea and biscuits, the board members agreed the global economic downturn may be bottoming out, particularly in the US and China. As for Australia, well we seem to have dodged another bullet in the GFC barrel. Perhaps we can reword treasurer Paul Keating’s famous utterance from the early 1990s from ‘the recession we had to have’ to the recession we nearly technically had, but haven’t quite really had and maybe won’t? Or something like that.

In other news …

On the Burgernomics front The Economist magazine has just released its latest Big Mac™ Index. This uses the price of the ubiquitous McDonald’s™ meal to work out how much a Big Mac™ costs in different countries. Apparently the US dollar buys the most burger in Asia with a Big Mac™ in China costing half what it does in the US. Businesses based in continental Europe have the most reasons to be cheesed off; it seems they have uncompetitive currencies. The euro is almost 30% overvalued and the Swiss franc is one of the world’s dearest currencies.