Peter Costello and John Howard have had better weeks. With Cossie reeling from the leadership stoush, the first issue he has been forced to face is every Treasurer’s worst enemy – rising inflation. John Howard was preparing for great birthday celebrations in lovely Melbourne before the inflation news went and ruined his day. Now the ACTU has announced that it will use the higher-than-expected inflation reading as the basis for a $30 across-the-board increase for all minimum wage rates.

Henry is pleased to present a brilliant piece of forensic analysis by Stephen Koukoulas of TD Securities. Koukoulas has dissected the latest CPI data every which way to remove the effect of various special factors like Cyclone Larry, The Chinese economy (on balance a depressing effect) and the price of petrol (inflationary, arguably part of the “China effect”)

In today’s AFR, Mark Davis connects the dots between inflation and electoral failure. Drawing on research conducted at the University of Melbourne, Davis says “nearly 80% of variations in electoral results since federation can be explained by inflation, unemployment, wages and economic growth.”

“Inflation was the most statistically significant of the variables and the one with the largest numerical impact on electoral support for incumbent governments.”

“So while Costello and Howard have made disapproving noises about the likelihood that the Reserve Bank of Australia will lift interest rates…the best way to read these comments is as blame deflection and political distancing rather than a serious attempt to sway deliberations at Martin Place”.

JWH and Cossie used their low interest rate reputation to help them get re-elected – but we have had six rate rises on the trot, with a seventh looking certain next week, and almost certainly at least one more to come. Henry would have thought that the Government would prefer a couple of well-timed rate hikes now as opposed to more hikes in the run-up to next year’s election – but then, Henry is (obviously) no politician.

Even better would have been a more responsible monetary policy two or three years ago but, as Willie Nelson puts it: “There’s nothing I can do about it now.”

Read more at Henry Thornton.

Peter Fray

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