“Acting as needed to keep inflation in check in the near term… preserves future flexibility.

“It is that strategic requirement to which central banks should be, and I believe are, paying close heed. As we do so, of course, we will be bearing in mind the lagged effects of the policy adjustments already made. If we can successfully see off the higher inflation of the past year or so, we will have done a lot to establish the conditions needed for ongoing growth”.

This is the respectable and conventional conclusion to RBA Governor Glenn Stevens’s speech last evening to the economists of Sydney.

Far more interesting is his analysis of exactly what is going on out there in the real world. No great surprises on the international scene. The US has slowed, and may slow by more yet, although Australian and British experience suggests the US housing bust need not be all that severe. Euroland and Japan chugging along more or less as expected. China is booming, and Stevens allows himself a quizzical thought that perhaps Chinese inflation might remove a source of assistance to the international brotherhood of central bankers.

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It is his careful analysis of the local economy that is of most interest, and shows why he (or someone like him) is needed.

“Inflation in Australia has risen, and not just because of prices of petrol and bananas… At face value, the output and employment results suggest a marked change in the trend in productivity in Australia over the past few years. The various measures of GDP per hour worked suggest there has been approximately zero growth in productivity since the end of 2003. This compares with an average annual pace of growth of 2% or more in the preceding decade”.

What follows is a nice, if unresolved, bit of forensic analysis, which I urge my sole subscriber to read carefully. Henry is willing to bet that the answer is that GDP growth is stronger than currently estimated, but he may be unduly influenced by the time the Australian Bureau of Statistics (ABS) found a bundle of returns behind a filing cabinet, after which Australia for a time had “statistical discrepancy led growth” of some magnitude.

Do watch Glenn Stevens’s speeches. He will eventually explain to us all just what is the resolution of the puzzle. We can but hope he figures it out soon enough to get the setting of monetary policy more or less right despite the uncertainties in the data and the lobbyists blowing in his ear.

Read more at Henry Thornton