Wednesday, July 23, 2008

Inflation out of control

The Australian media has been buzzing with the key theme of "inflation" all year. By inflation, they always blindly refer to the government manufactured figures of CPI, our price index.

News reports swing back and forth between all statements and interest rate movements performed by the Reserve Bank, and between reports on economic indicators, such as credit growth, housing prices, oil prices and unemployment.

Within this focus, commentators have been eager to look for signs of "relief" for consumers. Any chance of interest rate cuts is considered a positive news story, and the media are praying for signs that inflation has started fading away. Unfortunately the latest CPI figures run at 4.5%.

Today's report is headlined "Inflation at highest since early 1990s"

INFLATION rose to its highest levels since the early 1990s today but economists are not tipping an immediate movement on interest rates.

The headline consumer price index (CPI) rose 1.5 per cent in the quarter from the March quarter, taking the annual pace of inflation to 4.5 per cent, the Australian Bureau of Statistics said today.

Further on in the report, Reserve chairman Glen Stevens gazes into his crystal ball and somehow produces a forecast for the media to faithfully echo to the public:

“On the information available at present, we still expect inflation to fall back to 3 per cent by mid 2010, and to continue declining gradually thereafter,” Mr Stevens said.

Let's see how our supreme chief of monetary policy has fared in his past efforts at predicting the future:

Back on July 1st this month, he made a very weak prediction with a lot of qualifications:
Inflation is likely to remain relatively high in the short term, and the CPI will be further boosted in coming quarters by the recent rises in global oil prices. Looking further ahead, inflation in both CPI and underlying terms should decline over time, provided demand continues to evolve as expected.

Its pretty plain to see why he would make such a weak statement - he realises that his past predictions are very inaccurate and that consumer prices are completely out of his control. Take a look at his past predictions:

December 2007:
Inflation on a year ended basis, as measured by the CPI and underlying measures, is likely to be above 3 per cent in the first half of 2008, and to decline somewhat thereafter.

November 2006
This combination of forces has contributed to an increase in inflation. In the September quarter the underlying inflation rate was around 3 per cent, up from 2½ per cent at the end of last year, and it is likely to remain around that rate in the near term. The headline CPI increase has been noticeably larger than this recently, though this reflects some temporary influences which will be reversed in the quarters ahead.

Back in August 2006, under former governor Ian McFarlane, after raising interest rates, he announced:

Given these circumstances, the Board judged that an increase in the cash rate was warranted in order to contain inflation in the medium term.

So the last couple of years has involved the Reserve Bank making general predictions that have not really come to pass, as they slowly raise rates, and predict that inflation will be a little bit high but will be contained in the medium term.

This whole circus is utter nonsense. Their predictions are vague, cautious and never hit the mark. Their actions have little or no effect, other than to slow down the growth of the supply of money as interest rates are pushed up.

  • Why do we need to authorise and empower central banks to set the price of money for the entire economy ?
  • Why do we discuss consumer prices instead of something far more relevant - the actual supply of money (which is the true meaning of inflation)?
  • Why do we need a central bank in a free market ?
You won't ever hear these questions discussed by the pundits. A rare TV moment occurred when John Stewart asked Alan Greenspan, considered by these same pundits as the greatest central banker of our era, why we need a central bank at all.

Alan Greenspan didn't have a meaningful answer to that question. But like all central bankers, he knows that its about protecting the privileges of the banking cartel, enforcing the use of only one legal tender, and never allowing our big banks to fail.