Sunday, July 30, 2006

Howard's Bananas

This week, Prime Minister John Howard was quoted in the press as saying ...

"It's [the Reserve Bank] got to look at the underlying inflation rate, it's got to realise in relation to the bananas … that will flow through and disappear."
Mr Howard's motivations here are twofold:

  1. he wants to influence the Reserve Bank's decision-making at its monthly meeting on Tuesday 1 August. The Reserve Bank is (supposed to be) independent of the Federal Government, and sets the interest rates according to economic indicators, forecasts and target rates of underlying inflation.

    It is inappropriate for Mr Howard, Treasurer Peter Costello, or any other government minister to attempt to interfere with the independence of the Reserve Bank.

  2. Yet Mr Howard has a vested interest (pun-intended) is so doing. He does not want interest rates to rise, because he fears the electorate will hold him responsible. By using bananas as a scapegoat, Mr Howard is trying to deflect attention from other causes. Among this is the significant rise in petrol prices. Rising petrol prices have both simple and compound effects. The simple effect is that the weekly cost of living has increased as people spend more to maintain their current fuel useage. The compound effect is that the rising cost of fuel affects the delivery costs and prices for every good sold in Australia.
Simply removing the cost of bananas will not have any significant effect on the CPI and it is deceptive of Mr Howard to try to trivialise the cuases of the CPI figure, and to blame on "bananas".

The Analyst