Thursday, April 24, 2008

Petrol Prices Fueling Inflation

The latest inflation figures have hit the front pages and the news is not good. At 4.2% for the year to March, inflation is still well outside the desired range as decreed by the Reserve Bank Of Australia. So does that mean we should expect more increases in interest rates? Perhaps. But at the very least it means we can’t expect interest rates to fall anytime soon. The problem is that successive interest rate rises so far don’t seem to have stopped inflation. Maybe there’s a lesson in that.

If we look at where the CPI is rising most quickly it’s easy to see that petrol is at the top of the list. The price of petrol has increased 18.9% in the past year. Far from indicating an economy that is overheating, the rising price of petrol is more likely to actually be putting the brakes on the economy overall as both people and businesses struggle to cope with increased costs. Worse than that, because the price of fuel is largely determined by international factors, interest rate increases are unlikely to cause the price of petrol to fall. The result is that overall inflation will be seen to continue to rise, even in the face of higher interest rates.

There are also signs of an economic slowdown, with reports that retail sales figures have dramatically slumped. Add to this the uncertainty of the global credit crunch, and it’s not a big leap of the imagination to start worrying about a possible recession.

All of this leaves Treasurer Wayne Swan confronting a significant challenge in constructing his first budget. The notion that the government needs to preserve a budget surplus is only part of the picture. While inflation is making it increasingly difficult for Australians to make ends meet, it will be seen as arrogant and out of touch to sit on $20-Plus Billion while pensioners go without groceries. It is impossible for budgetary measures to prevent the effects of a global downturn, but it is possible to help cushion people from them.

The battlers of Australia are depending on Wayne Swan not to let them down.

No comments: