Wednesday, October 24, 2007

Howard's Inflation His Own Poison

Today's economic news was all about interest rates and inflation. Treasurer Costello tried to use the media to put pressure on the Reserve Bank to not lift interest rates when it meets on Melbourne Cup Day by citing only the official 12-month figure for inflation. He avoided any mention of: the underlying rate of of inflation (the cpi was almost 1% for the quarter) or the rate at which that figure is increasing.

With a big budget surplus, Howard and Costello are spurging in election-promise spending. But it is not good economic management. In November 2006, I wrote:
"Monetary Policy (interest rates) is a blunt instrument against inflation. ...
Successive "tax cuts" have produced more spending than the value of the tax
cuts. That is, we created more money and inflation than the tax cut."

The underlying rate of inflation, and the speed at which that is increasing is a concern for the Reserve Bank. In July 2006, John Howard said that it was important that the Reserve Bank focus on underlying inflation. (it was when banana prices were very high after a cyclone ruined much of Nth Queensland's crop). That Peter Costello is studiously trying to ingnore that fact right now is a measure of his desperation and lack of candour with the Australian people.

High, and an increasing rate of, underlying inflation indicates poor economic management by the Federal Government in its budget spending - poor management that will likely see an unprecedented rate rise in an election campaign.

It's as though the government has decided that, if it's going to lose, it should make things as difficult for the Australian people and the next government as possible.