Needless to say, Henry almost choked on his Weet-Bix this morning as a newsreader announced confidently that “According to an OECD report, homeowners can expect a cut in interest rates by as early as mid-2007”.

Indeed, the OECD’s latest assessment of the Australian economy forecasts that the drought is likely to add downward pressure to economic growth, add to unemployment and cut inflation. While the drought is likely to drive up the prices of food products (which are not calculated in the underlying measures of inflation, anyway), it is also likely to curb domestic demand, which will indeed restrain inflation.

The newsreader in question also went on to say how a speech by the RBA’s Head of Economic Analysis Department, Tony Richards, claimed that inflation could fall down below 1% as petrol and fruit prices declined. While this is strictly true, Richards’s speech was actually about which of the various measures of underlying inflation was best at accurately reflecting general price increases.

Richards’s conclusion was sensible: “All in all, it is unlikely that any single measure of underlying inflation can be held up as the ‘best’ measure at all times and in all countries…there will be no substitute for detailed analysis of all the forces driving the CPI at any point in time.”

Obligingly, one of Henry’s favourite economists, Stephen Koukoulas, carried out such analyses of the second and third quarter Consumer Prices Index figures. His conclusion after the third-quarter CPI data was released a month ago was:

“The inflation outcome is sufficiently high, in concert with the tight labour market, a housing rebound and an under-valued AUD, to generate speculation that the RBA will need to look at further interest rate rises in the New Year.”

Henry also remains sceptical that the current rate of interest is enough to bring inflation under control, but only time and the run of data will tell. Home buyers, however, agree wholeheartedly with Henry. According to the Oz, “Almost nine in ten people believe interest rates will rise again in the first quarter of next year, according to a survey by broker Mortgage Choice.”

In US consumer confidence news, the ABC News/Washington Post Consumer Index remains at its highest point in four and a half years despite the slumping house market and the falling American dollar. Interestingly, Americans’ ratings of the buying climate advanced this week to their best level in four and a half years – somewhat contradicting the report yesterday that falling Wal-Mart sales indicated bearish consumers.

Read more at Henry Thornton.

Peter Fray

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