Henry Thornton will be very happy indeed.

“The Coalition’s confidence of riding into this year’s election on falling or at least stable interest rates is being shaken, with economists warning next week’s inflation figures could trigger another hike,” David Uren writes in The Australian today:

Three of the nation’s big banks now believe it is even money as to whether the Reserve Bank raises rates when it meets in two weeks, for the first time this year, while the fourth thinks a rise is now likely.

All agree next week’s inflation figures will determine whether the Reserve Bank raises rates for the fourth time in 12 months, from the current 6.25per cent. If consumer costs rose by more than 0.8 per cent in the December quarter, another rate rise is certain.

Access Economics calculates that every 0.25 percentage point rise in interest rates takes $2 billion out of consumers’ pockets…

But what about inflation itself? Did that stop being an issue about the time One Night in Bangkok graced the charts? Anatole Kaletsky had some good reflections earlier this week in The Times. Running off the UK figures, he commented about the gap in price rises between goods and services – and the impact of changes in consumption:

[P]rices for manufactured goods have been driven down by low-cost competition from China and other emerging markets, while services, such transport, entertainment and local government, have continued to rise…

[W]workers in sheltered service industries, especially finance and government service, have enjoyed much higher pay than those in factories exposed to global competition…

However, another consequence of divergent goods and service inflation has, to some extent, offset the widening disparity in wages between lower-paid workers and high-end service providers, such as bankers, lawyers and civil servants.

Rich people spend much more on expensive services such as private education, entertainment and health than the poor, who spend most of their money on food, clothes and other essential goods.

This means that inflation tends to be higher for the rich than it is for the poor. In other words being rich has never been so expensive. Conversely, it has been getting cheaper to be poor.

The relatively low inflation faced by poor households, which spend relatively little on expensive services and buy cheap imported goods in discount stores where price competition is at its most intense, is probably one reason why inflation has not been perceived as a serious problem either by the public or by politicians, at least until recently.

In the past few months, however, the relatively benign social character of inflation — hitting the rich much harder than the poor — has been changing. The main upward pressure on inflation no longer comes from luxury services, such as private education, but from unavoidable spending…

The fact that rising prices are now hitting people on relatively low incomes could dramatically change both the politics and the economics of inflation… [T]he impact of inflation on working-class households means a greater risk that it will trigger union militancy and wage-price spirals of a kind not seen in Britain for almost 20 years.

Will inflation be an issue here? Probably not. Unfortunately, though, one of the most basic remedies for inflation is an interest rates rise.

Peter Fray

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