Former NSW auditor general Tony Harris had a fascinating column in The AFR this morning which suggests the Federal Treasury was either bullied or cajoled into hiding its real views on inflation before the election.

Peter Costello released the Mid-Year Economic and Fiscal Outlook on October 15 which was two months earlier than normal and became the political vehicle he used to roll out those $34 billion-plus of grossly irresponsible and inflationary tax cuts.

As Harris asks, why did Treasury actually lower its inflation forecast for 2008-09 from 2.9% to just 2% in the MYEFO and then provide formal briefing papers to incoming Treasurer Wayne Swan a few weeks later which warned the CPI would exceed 3% for the next 18 months?

All of this makes it even more interesting that Alan Kohler claimed on Business Spectator yesterday that Treasury Secretary Ken Henry is about to land the biggest public service job in the country as head of Prime Minister & Cabinet.

Was Ken Henry nobbled by Peter Costello? Did Treasury massage their own forecasts for political purposes or did something happen between October 15 and mid-December which caused the substantial increase in inflationary expectations? The public deserves a full explanation about who said what to who and why, a bit like we got with children overboard after the 2001 election .

Meanwhile, Malcolm Turnbull was absolutely right on AM this morning when pointing out that inflation is one of those self-fulfilling things.

The more Wayne Swan and Kevin Rudd talk about Australia’s “major” inflation problem, the more this will self-fulfil through wage claims and price increases.

As Malcolm asserted, The Financial Times did indeed send a news alert this morning focusing on Australia’s inflation “problem”, even though our prices are rising more slowly than the US, China and many other major economies. But if foreign investors perceive we’ve got a major and worsening inflation problem, they will require a greater interest rate premium to roll over that $600 billion of foreign we’re trying to service.

Malcolm is someone who has shot from the hip for decades, so it was amusing hearing him lambaste the government in the following terms:

“The problem with Mr Rudd and Mr Swan at the moment is that the language they are using is so immoderate, so unmeasured it’s actually creating economic problems for us.”

Ironic but correct, too.

Peter Fray

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