“How does that saying go? Don’t count your interest rate cuts before they are nearly hatched, or something like that.” So writes Alan Mitchell is today’s AFR.

Yesterday’s much stronger than expected employment data has put an end to suggestions, emerging less than a month after the RBA hiked rates by 25 basis points, that we will be seeing interest rates cut in the first half of 2007.

Henry’s thesis is that to talk of rate cuts when our economy is experiencing capacity constraints (witness 4.6% official unemployment rate), while underlying measures of inflation are outside of the RBA’s comfort zone, is mere needless chatter.

But the dislocation of the national account figures from the other economic statistics is a worrying sign – unless the RBA is able to rein in inflation while the economy slows to a crawl, we have stagflation. Indeed, another oil shock would send inflation rising again, which is not altogether out of the question.

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More support for the theory that the Australian economy remains strong in the face of the “once in a millennium” drought came today with the release of the December Roy Morgan Consumer Confidence Rating. Despite the November interest rate hike, consumer confidence jumped 5.9 points to 117.4.

This latest consumer confidence reading reflects what has occurred after each of the other 2006 rate hikes – consumer confidence has immediately fallen sharply after each rate hike, but has recovered within the next month. Now, with the Christmas shopping season around the corner (or already upon us, if you’re well prepared), consumer confidence has bounded back yet again.

As Henry said recently, Economics 101 doesn’t cater for stagflation, but history has shown that it occurs and is a sure-fire prosperity-killer. While there is sure to be debate about which statistic is wrong (with good reason), it is just as likely that the factor constricting economic growth is supply-side constraints (low unemployment, the skills shortage, high fuel prices), which are both inflationary and economically restrictive.

The confusion over apparently contradictory economic statistics only serves to remind us that the role of the RBA is to keep inflation within the 2-3% comfort zone – at present it is outside of that zone, and that is why rate cuts are out of the question.

Read more at Henry Thornton.