The focus of most analysis of the June quarter CPI
has been the impact of banana prices and petrol costs on the headline result.
Certainly the Prime Minister and Treasurer appear to be pressuring the RBA
not to hike interest rates because, according to Mr Howard, “both of them
have gone up …because of forces no government can control.”

And sure, fruit and petrol added 1.0 percentage points to
the 1.6% qq rise in the June quarter CPI.
But to discount the whole inflation result because of a couple of big ticket
increases is spurious, disingenuous and not all that helpful for assessing RBA
policy deliberations and longer term inflation performance.

What has been over-looked is the incredible deflation
impetus from what could be dubbed the China
effect – clearly a factor “no government can control.”

The so-called China
effect is the tendency for many goods prices to be falling because of the
transfer of production to the low cost Chinese manufacturing sector. In the
year to the June quarter, Australia
enjoyed a significant deflationary effect from China,
without which, headline inflation would have been around 5.2%.

Note, for instance, the following which are China
and/or manufacturing related which occurred in the year to the June quarter

Clothing and footwear: -1.7% [Weight in CPI

Furniture and furnishings: -0.3% [Weight 2.99%]

Household appliances, utensils and tools: -0.8% [Weight

Audio, visual & computing: -4.7% [Weight 2.68%]

Sports & recreation equipment: -3.5% [Weight 0.51%]

Toys, games and hobbies: -1.9% [Weight 0.49%]

Motor vehicles: -0.9% [Weight 4.67%]

These items make up one-sixth (16.72%) of the overall CPI
basket, and the weighted average decline of these items over the year to the
June quarter was 1.7%.

Without these items, the CPI
increase would have been a tub-thumping 5.2% over the year to the June quarter,
a horrendous outcome that would surely undermine the competitive position of
the economy. So ‘thank-you’ China that Australia’s inflation position is not
prompting the RBA to hike 50, 75 or even 100
basis points next week!

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