Australian retail sales rose 1.3% in
June on the back of a 1% rise in May 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 reiterate 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

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

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 more on the Henry Thornton website here.

Peter Fray

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