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 MARKET REPORTS |
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Economic commentary
Inflation pressures just “tommy rot”
December 5, 2007
Dr Ron Woods, Econoclast
You don’t need a license or register to be an “economist”. Perhaps that is why a lot of self-described
economists from brokers and banks spread ideas which are nothing more than a load of Tommy rot.
The last
couple of days more talk of “inflation pressures” as they call it has occupied their prognostications. Equally ill-
informed editors dutifully report the nonsense that this must be countered by more rate rises. Take the latest
“Inflation [sic] Gauge” sponsored by a stockbroker who triggered this drivel: “auto fuel was the greatest
contributor...followed by rises in prices at deposit and loan facilities, fruit, and rental accommodations” taking
‘inflation’ well outside the Target Range; Tommy Rot.
The ten rises in cash rates in the last five and half years
has directly fed into “rises in prices at deposit and loan facilities”; the 10 rate rises have also led to a stalling in
housing construction which pushed up the price of “rental accommodations”. Like a dog chasing its tail if this
“Gauge” indicates more rate rises, the gauge will keep rising due to “rises in prices at deposit and loan
facilities...and rental accommodations”, and so on until goodness knows where it will end.
As for the other
contributors, higher official rates won’t solve Climate Change, to keep food prices down, nor result in Middle
East peace (or even a counter-revolution in Venezuela) to keep oil prices down. In fact in the last official data
prior to November’s official rate rise, the “CPI excluding housing, financial and insurance services” (factors
directly impacted by previous rate rises) but including food prices, rose by only 1.1% over the last year, even
lower than the headline 1.9%. Some prices are rising, some are falling but there is no inflation.
More to the point all of this is largely a façade anyway. The RBA uses it as the excuse to raise rates. You see
the real reason official rates have gone up the last five times from May 2006 is because the RBA believes the
Resources Boom has over-stimulated the economy causing the unemployment rate to fall too low. The rest of
the non-resources part of the economy, where around 75% of the population live has had to endure higher rates.
The result is causing pain, as the voters displayed in the recent election (in the States with higher economic pain
the higher was the swing away from the Howard government). The too high rates are also putting at risk the
economic outlook at a time when the RBA’s rate excuse, the Resources Boom is teetering.
Of the four pieces
of economic data (official and unofficial PR nonsense) in the last few days (Retail turnover and Building
approval and the “inflation [sic] gauge”) it was the RBA commodity price index that likely
takes the cake: it showed the Aussie dollar Base Metal prices continued to retreat.
The annual price change is
now falling by more than 18% to November. This indicates that the stimulus from that boom is abating and we
see that in today’s official data: Retail turnover is slowing down quite sharply in Western Australia, and even
elsewhere while it has improved it is far from boom time levels. Australia-wide Retail turnover excluding Food
(its higher prices give a false picture) are still at a pace some 40% lower than the peak in late ’03 before the ten
rate rises starting to fully hit the economy.
Equally, Building approvals are far from booming and the last five
rate rises from mid-2006 have yet to fully negatively impact this series; and again in the “West” building
approvals are heading south as the impetus from Resources fizzles.
The risk to investors remains that with so
much Tommy rot around we may also have to put up with equally poor quality returns from some assets.
Dr Ron Woods, regarded as one of Australia's leading market economists, has a knack for being far ahead of the curve in assessing the direction of the economy. With a PhD in Economics, Dr Ron Woods is a well-known commentator on economics and interest rates, and has worked for the Commonwealth Bank, Bankers Trust, NM Rothschild and Challenger. Dr Ron Woods produces the newsletter Econoclast, a fresh look at Australian economic events.
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Investing: How to make money from new energy plays
Stocks: Stocks for the Long Haul – QBE and Leighton Holdings
Resident Trader: A frustrating foray into forex
Trading: The ultimate guide to trading shares for beginners - part 4
Markets: Cash injection won't help liquidity crisis
Economics: Inflation pressures just “tommy rot”
Outlook: The impact of commodities prices on mining companies
Rates: RBA leaves rates on hold
IPOs: Surge of IPOs deliver scant returns
Markets: ECB, US officials downbeat on recovery
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