The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the March 2011 quarter today and it revealed a sharp spike in the headline inflation rate (up 1.6 per cent for the quarter) but a very benign underlying inflation story. Overall, the impacts of the natural disasters (floods and cyclones) are driving food prices up and world oil price movements are causing local petrol prices to rise. These impacts are likely to be transitory. It is interesting that there is considerable disagreement among bank economists about what the data release means. Many are joining my chorus and suggesting that the transitory nature of the inflation influences will not compel the Reserve Bank to push up interest rates. At present, the data tells us that there is no inflationary outbreak evident and other data suggests that the economy is slowing.
The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the December 2010 quarter today and it showed that inflation continues to fall. The ABC News reported that – CPI figure comes in below expectations. Who’s expectations you might ask? Yes, the bank economists and other main-streamers who have a one track obsession that whenever there is some sign of growth there must be inflation. Wrong again. It was clear that inflation is moderating notwithstanding the spikes that will come in the next months as a result of the flood disasters. But when will the inflation-obsessives give up on the idea that the budget deficits cause inflation. The reality is that the Australian economy is slowing down and there is still a significant amount of spare capacity available for real output expansion should aggregate demand rise. Some sectors are growing strongly (mining) but that unlikely to create significant cost pressures elsewhere in the economy given the amount of labour slack. Last month I gave the bank economists a tip. Consult the ideological chart and then predict the opposite. They would have predicted the data movements more accurately if they had have taken my advice. There is no inflationary outbreak evident – the economy is slowing.
The UN Food and Agriculture Organisation (FAO) released their monthly index of food prices yesterday (January 5, 2011) which showed that the index reached a record high in December 2010 “surpassing the levels of 2008 when the cost of food sparked riots around the world, and prompting warnings of prices being in “danger territory”” (Source). There are several reasons why food prices will move even higher – the catastrophic floods in Northern Queensland being among them. The rising food prices are once again leading to calls for interest rates to rise in order to minimise the inflationary consequences. That motivated me to write Part 2 of my series on inflation – in this case supply-side motivated inflations. In Part 1 of the series – Modern monetary theory and inflation – Part 1 – I concentrated on demand-side origins.
When does the word down mean down? Answer for all of us mortal folks: when something is consistently pointing downwards. Answer for the bank economists: never when it is applied to movements in the Consumer Price Index – down means up. The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the September 2010 quarter yesterday and it showed that inflation is moderate and falling. Over the last week, the bank economists ran their usual line – they were predicting spikes in the inflation rate and thus the absolute necessity for increasing interest rates at the next RBA meeting. As usual they were wrong. The reality is that the Australian economy is not overheating and it is still a long way from being at full capacity. Some sectors are growing strongly (mining) but that unlikely to create significant cost pressures elsewhere in the economy given the amount of labour slack. I have a tip for the bank economists. They should come out next month/quarter and say exactly the opposite to what they typically would say – and they will probably get it right. At least while they are worrying themselves sick about the course of inflation they are not screaming about the deficit being too big.
On July 20, the Reserve Bank of Australia (RBA) published the Minutes of its last board meeting (July 6, 2010). This caused headlines for the day – the journalists must have been bored that day – because it raised the possibility that the RBA would increase interest rates in August – right in the middle of an election campaign (the federal election is late August). The bank economists as usual predicted rising rates and significant spikes in the inflation rate. Well today the the Australian Bureau of Statistics released the Consumer Price Index, Australia data for the June quarter and it showed that inflation is moderate and falling. The market economists were “surprised”. I wonder if their organisations have any money dependent on the judgement of their economists? I wouldn’t bet a cent on the basis of their opinions. They continually make false predictions on the outcomes of all the major data releases – always claiming that the economy is overheating and that fiscal support has to be withdrawn. Nothing could be farther from the truth.
It regularly comes up in the comments section that Modern Monetary Theory (MMT) lacks a concern for inflation. That somehow we ignore the inflation risk. One of the surprising aspects of the public debate as the current economic crisis unfolded was the repetitive concern that people had about inflation. There concerns echoed at the same time as the real economy in almost every nation collapsed, capacity utilisation rates were going down below 70 per cent and more in most nations and unemployment was sky-rocketing. But still the inflation anxiety was regularly being voiced. These commentators could not believe that rising budget deficits or a significant build-up of bank reserves do not inevitably cause inflation. The fact is that in voicing those concerns just tells me they never really understand how the monetary system operates. Further in suggesting the MMT lacks a concern for inflation those making these statements belie their own lack of research. Full employment and price stability is at the heart of MMT. The body of theory and policy applications that stem from that theory integrate the notion of a nominal anchor as a core element. That is what this blog is about.