“Too little, too
That, surely, is the verdict on Ian Macfarlane’s Reserve. Inflation globally is
on the rise and global inflation is set to rise further. In Australia the economy is benefiting
from a major mining boom and this is helping to produce severe shortages of
skilled labour, unsustainable growth of credit and rising inflation, which has
already raised inflationary expectations. All these facts are indicators of
inflation yet to come.

It is also a fact
that firmer monetary policy throughout recent years would have left
Australia in far better shape now. Inflation would be lower, the exchange rate would have been higher (so fuel
prices in Australia would have been lower),
debt would have been lower and the economy would be more competitive. NSW and
Victoria would not be condemned to the slow track, and the resource states would
not be booming out of control.

This is Henry’s
summary of the past decade of monetary policy. Looking ahead: “… the bigger
challenge for Governor Stevens will be to confront and subdue Australia’s current inflationary
pressures without unduly hurting economic growth and jobs. It is sadly the
poorer members of Australian society who will suffer most, and this will worry
Glenn Stevens quite a bit, as it should.”

This is not just
the view of one grumpy old economist. For example, David Uren writes in The Weekend
: “The Reserve Bank faces the gravest inflationary
threat since the early 1990s, warning it may turn into a wage-price spiral that
would need to be reined in with higher interest
rates. In what
economists described as a warning that the ‘inflation genie’ may escape, the
bank admitted the biggest risk to the economy was that inflation became
entrenched as trade unions demanded bigger pay rises and businesses sought to
recover rising costs by putting up prices.”

Henry Thornton.

Peter Fray

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