Australian retail sales rose 1.3% in June on the back of a
1% rise in May of this year according to ABS statistics released yesterday.
The jump in sales supports Henry’s view that inflationary pressures are
mounting.

Productivity growth has slowed, and on some measures is
negative. Wages are beginning to stir, with the unions beginning to pick off
their political brethren at the State levels. The shake-up to the industrial
relations landscape is likely to have a surprising outcome as employers
scramble to retain workers the only way they know will work – wage rises.
The TD Securities Melbourne Institute monthly index of inflation has shot up to
3.0% in July. Oil prices remain at high levels and each surge reaches a new
higher level.

Indeed, with wages growth rising and zero or negative
productivity growth, inflation into 2006 is set to rise well clear of the
ceiling of the 2 – 3% target range. No doubt, when it happens, the RBA
will re-iterate that the target is only an “average over the course of
the economic cycle”. We doubt the bond market – with its global
origins – will be so complacent.

Nevertheless the RBA, as expected, has not raised interest rates,
instead leaving the cash rate target unchanged at 5.50 per cent.

Whether or not Australia can retain its
“miracle economy” status as inflation builds and with a monster
current account deficit is the big question and only time will tell. Resource
booms like the one we are now enjoying almost always end in tears. We would
have preferred that our central bank had played a far more cautious game, but
instead must enjoy the boom while we can.

Read the full story here.

Peter Fray

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