The economy is an inflationary powderkeg waiting to explode

So says SMH political editor Peter Hartcher:

All they need do is pay the tax cuts into our superannuation accounts. That way the money is not spent in an inflationary way in the next couple of years, but stored up and invested for the future.

It’s a good way to help prepare for the ageing of the population, and it boosts national savings. But no, like trained monkeys that know only one trick, all they can do is keep doing what they’ve done before.

After Howard announced his plan to offer an extra $34 billion in tax cuts over the next three years, three things happened.

First, the futures market re-evaluated from 70 per cent to 85 per cent the likelihood that the Reserve Bank would have to raise interest rates over the year ahead to contain inflation.

Second, the headmaster of the global economic system, the International Monetary Fund, warned Australia to restrain spending to contain inflation.

And third, Rudd ignored both of these and went ahead and aped Howard’s inflationary tax cuts. Yes, Labor did return to the surplus $200 million more than the Government plans to do over three years. This allows Labor to claim it’s being more responsible. But this is 0.02 of 1 percentage point of the federal budget. It’s a fig leaf of responsibility, not a laurel.

It is, as he says, a fairly simple metric. If no part of federal government helps out the Reserve Bank in containing purchasing power/inflation, the Reserve has to apply all the brakes it has. It appears, moreover, that said braking is coming soon:

Home owners – and John Howard – are bracing for the sixth successive interest rate rise since the last federal election after underlying inflation slammed to the top of the Reserve Bank’s target band of 2 to 3 per cent.

A predicted decision on Melbourne Cup day for a 0.25 percentage point increase, only weeks before the election, would boost the average home loan rate above 8.5 per cent for the first time since November 1996.

Payments on a $400,000 loan would rise by $67 a month, bringing to $395 the cumulative impact of six rate rises since the last election when Mr Howard campaigned to keep rates low.

What a shame he can’t get some Federal Reserve governors to play along with artefactually inflationless inflation statistics. We can look forward to seeing more calculations coming out, concerning specific increases in costs of living, since Howard won his last election on the promise that interest rates would hold steady, under him.


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