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  • Writer's picturePete Jonson

Henry Thornton News & Views No 29

I have been asked to talk on ‘inflation’, a subject that requires discussion of 'Macroeconomics’ and some coverage of major countries, especially US, China and the UK as well as Australia.


After forty years of low inflation, inflation has jumped, a word designed to suggest a quick rise in some cases to double figures. At latest measure

· US inflation is 9.06 pc and possible still rising despite a small reduction.

· China’s inflation. China’s inflation rate has been relatively low, at 2.6 pc due to its limited stimulus during the pandemic and the weighting of goods and services in its CPI basket.

· European inflation is 8.6 pc

· UK inflation is 12.7 pc

· Australia's inflation is assumed to peak at an annual rate of 7.7 pc by the December quarter of 2022. Current official views are that Aussie inflation will fall from that peak. My view is continued increasing, possible to 10 pc.

· China is still battling with unusually low goods and services inflation, and low inflation. Indeed, some good thinkers say China’s rate of growth is very likely permanently much lower, and rising inflation will bother the senior people who handle China’s traditional inflation with low prices.

Macroeconomic causes

Traditional inflation is mainly due to demand causes.

Low inflation in the past 40 years, before this year, has been due to ‘reasonable’ demand forces. China is slowing rapidly and Chinese inflation is still largely due to slowing demand.

The four western nations (and the Eurozone group) are largely supply driven.

· US real GDP fell by 1.6 pc in March 2022 and 0.9 in pc June 2022.

· The U.S. current-account deficit widened by $66.6 billion, or 29.6 percent, to $291.4 billion in the first quarter of 2022, according to statistics released recently by the U.S. Bureau of Economic Analysis.

· ‘During the regular American press conference, Chair Powell said he could not predict monetary policy range for next year and that next decisions will be data dependent. Powell also said the central bank will be looking for moderately a restrictive level by the end of the year, meaning a 3% to 3.5% level for the fed funds rate. Source’: Federal Reserve

· In my view, cash interest rates globally were far too low, near zero in most cases, and central banks are struggling to raise cash rates to sensible levels.

· The UK’s Gross domestic product (GDP) fell by 0.3% in April 2022, after a decline of 0.1% in March 2022; UK GDP increased by 0.2% in the three months to April 2022.

· The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting, ending on 3 August 2022, the MPC voted by a majority of 8–1 to increase Bank Rate by 0.5 percentage points, to 1.75%. One member preferred to increase Bank Rate by 0.25 percentage points, to 1.5%.

· As with US, UK also had a foolishly small cash interest rate, now being slowly rectified.

· Australia is a country with a sharp increase in GDP from 2000 to 2005 then some ups and downs, the latter likely to be in the ascendency.

· Cash interest rate was 0.1 per cent. At some recent time when Dr Philip Lowe said ‘cash rate would remain at 0.1 per cent until 2024’ lots of people who have borrowed money will be in trouble. Sadly, cash rate has been raised several times with changes of 0.5, and will keep rising from the current 1.85 per cent.

· Cash interest rate may rest at 2.50 per cent or may rise further.

· Overall, cash interest rates have generally needed a significant increase and central banks are showing signs of panic.

· Overall, inflation is far higher than in the past four decades and has been achieved quickly. The main cause for this is the fast increase of prices; of oil, gas, food, and other categories.

· This is what is called ‘inflation due to market prices’, or ‘supply inflation’ rather than ‘demand inflation’.

· Inflation will rise as quantity falls. This will make many people fair badly; in different places and in poorer countries these problems will be much more dramatic.

What can be done?

Cash interest rates increases should come to a reasonable end, probably between 6 and 15 per cent, depending on how far inflation has gotten away.

Australia may have inflation at the lower end, and UK and US at the higher end. China will struggle with higher goods prices and higher gas, oil, coal and other material.

Some detailed events.

AFR, Friday, P1 and P11, Foreign Affairs Minister, ‘Wong, ASEAN warn on China slip-up’.

‘In another day of high drama, China began days of intense drills involving live ammunition in seven zones around Taiwan, in what a state media documentary commentator said was a rehearsal for a blockade that would force the island to succumb to Beijing rule.

‘Several missiles were fired around Taiwan yesterday as China launched its response to Mrs Pelosi’s visit to the self-ruled island that Beijing regards as its sovereign territory.’

AFR, Friday, P1 and P 2, Phillip Coorey and Jacob Greber, ‘Climate hard work starts’.

‘The passage of legislation for Labor’s climate change target to reduce emissions by 43 per cent was only the beginning. Climate change minister Chris Bowen has cautioned, and the design of the safeguard mechanism and other aspects will be the next big challenge.

AFR, Friday, P1 and P 8, Ronald Mizen, ‘Iron ore, coal and LNG light up surplus.’

‘Booming iron ore, coal, and gas prices drove a second record in June that will boost economic growth and national income, and highlight momentum in the Reserve Bank’s push to normalise interest rates.

‘Exports grew 5.1 per cent to $61.5 billion outpacing a 0.7 per cent increase in imports to $43.8 billion, leaving a surplus of about $17.6 billion, according to trade published by the Australian Bureau of Statistics.’

‘AFR, Friday, P 7, Andrew Tillett, ‘French offer to Albanese: we can build subs’.

Perhaps a nice joke, but just possibly something like a viable way to block a capability gap to allow for the likely long time for receiving AUKUS nuclear ships.

But if there is any way to build some nuclear ships quickly, no such offer will work. (I’d be very pleased if Mr Dutton’s suggestion that we could get a few nuclear ships, even if they were a big elderly.)

AFR, Friday, P 12, Yu Yongding, ‘How low China GDP can go’.

‘After more than 40 years of breath-taking growth, it is not surprising that China’s economy has lost some steam’.

‘But with annual growth down from 10.6 per cent in 2010 to 6 per cent in 2019, the big question now is whether output from the world’s second biggest economy will continue to decline and at what level it will stabilise.’

‘China is likely to partially regain its growth momentum. But when downward pressure on inflation created by weak aggregate demand eases, inflation might surge.’

AFR, Friday, P 27, James Johnson, ‘How ‘economic war, will change inflation forever’.

“War, as Civil War general William Tecumseh Sherman famously said ‘War is hell.’ But is it also inflationary’?

‘What the scrambling of Taiwanese fighter jets and China’s live-fire military exercises mean for ASX share prices is difficult to say. But, at the very least, the tensions in Taiwan repress another shock at a time of great fragility in global markets.’

AFR, Friday, P 34, Simon Johnson, ‘Putin’s looming defeat in Ukraine’.

‘It is easy to see who is losing the most from the Russian invasion of Ukraine: Ukrainian civilians, victims of war crimes and missile terror; and the millions of people around the world for whom food is now more expensive because Russia until recently, has been blocking Ukrainian grain shipments through the Black Sea (and launching strikes on Ukrainian ports even after agreeing to a ceasefire.)

‘Russia is losing the war badly in both military and economic terms.

‘On the military front, the Russian looks increasingly dire. After suffering a catastrophic defeat in their initial attempts to take Kyiv and Kharkiv, in recent months the Russians gained some territory in the Donbas region. But this advance was entirely due to massive artillery bombardment.’

‘Now that the Ukrainians have longer range artillery, this Russian advantage is dwindling rapidly.’

AFR, 6-7 August, P1 and P4, Ronald Mizen and Jonathon Shapiro, ‘Business ready to pay higher wages.’

‘More than 60 per cent of business expects wages to rise more than 3 per cent in the coming year, and the 48-year-low jobless rate has prompted more than half to report that labor shortages are placing a ‘severe’ constraint on output’.

‘Wages are forecast to grow at the fastest pace in a decade, according the Reserve Bank’s quarterly economic update. However, despite the strong growth, 30-year-high inflation levels will send real wages backwards until 2024.’

AFR, 6-7 August, P1 and P 16, John Kehoe, ‘Jim Chalmers and Philip Lowe are carrying on their backs the weight of economics expectations and the fortunes of millions.’

‘Inflation is on track to hit a 32-year-high, interest rates are rising at the sharpest rate since 1994, the Federal budget has a structural problem and productivity growth – the ultimate determinant of living standards – over the past decade fell to its lowest level in half a century.

‘Agitated households will increasingly feel the pinch from the high cost of electricity, gas and petrol, just as the RBA governor lifts the official cash rate towards – and possibly beyond – the bank’s theoretical neutral rate of ‘at least’ 25 per cent.’

‘Glenn Stevens says his skin as RBA governor wasn’t thick enough at first, but ‘it got thicker’.

AFR, 6-7 August, P 43, Jacob Greber, ‘The Albanese government has set itself shining new policy goals. But tough decisions and better ideas will be required to achieve them’.

AFR, 8 August, P7, Fiona Carruthers and Jonanna Mather. ‘Tourists return slowly, but China leaves a large gap’.

‘China was Australia’s no. 1 inbound market in 2019 with more than 1.3 million visitors that year. But in the six months since the international border reopened, Chinese tourist visitors have recovered to about 4 per cent of what they were in 2019.’

FT, 8 August, P21 (for AFR), James Politi and Kate Guguid, ‘Big US job gains add to Fed’s work.

‘The figures released on Friday eased concerns that the American economy was sharply slowing or already in recession after two consecutive quarters of contraction in output this year. However, it will increase worries that high inflation may become entrenched as wages keep rising, requiring even more intervention by the central bank.’

‘Jobs haven’t slowed at all in response to Federal Reserve tightening. This is a double-edged sword, added Michael Gapen, Chief US economist at the Bank of America, noting that while the chance of a ‘near-term recession is lower’, the ‘risk of a hard landing is rising’.

AFR, 8 August, Editorial&Opinion, ‘The Taiwan crisis shows why China must change back’.

‘The question is whether China is going to emulate Russia’s road to ruin and exclusion from the global economy, at great cost to the welfare and prosperity of the Chinese people.

‘It is therefore important not to give in to the moral relativist temptation to explain away China’s action in the Taiwan as a response to US ‘provocations’.

‘Instead, unacceptable behaviour such as launching rockets over Taiwan needs to be called out as part of the global pushback against China’s assertiveness. Such gunboat ‘diplomacy’ is not the behaviour of the responsible international actor that modern China should be.

AFR, August 9, P1 and P 16, Peter Kerr and Simon Evans, ‘BHP bets on OZMin mines’.

‘Investors are betting that BHP will pay more than $8.3 billion to consolidate Australia’s best copper and nickel fields after the board of OZ minerals rejected a takeover bid that builds on a spectacular two years of deal making by the nation’s biggest company’.

AFR, August 9, P39, Chris Richardson, ‘We must find a better way of taxing our gas riches’.

‘There’s a huge gap between what families are feeling and how much they are spending.

‘Sales are strong even though sentiment is weak.

‘But will sentiment strengthen or will spending fall sharply? That’s vital, because how today’s gap between sentiment and spending closes will determine our economy’s outlook.’

And: ‘An ill-suited PRRT system means that Australia taxes its gas wealth far too lightly. It is time to play catch-up.’

AFR, August 10, P 38, Editorial&Opinion, ‘Australia’s green metals can power the electric age’.

‘Not for the first time, Australia’s largest company, BHP, is pointing the way to the nation’s future. The miner’s $8.2 billion bid for OZ Minerals would allow it to combine the production of three south Australian copper mines and boost smelting of nickel in Western Australia, creating scaled up hubs for the metals of the coming electrical age.

‘Yet the new world still has to be built from old materials, and some of the biggest barriers is not capital or technology but the anti-mining sentiment that hits even the future metals on which the green transition depends’.

AFR, August 11, P1 and P2, Andrew Tillett, ’23m Taiwanese will be re-educated, warns Chinese ambassador.’

My memory is that Ambassador Xiao Qian entered with some nicely written words, surprising really, and perhaps made us feel better about China and its management.

Sadly the worm has turned.

‘There is absolutely no room for us to compromise, over Taiwan', the ambassador told the National Press Club of Australia, warning Prime Minister Albanese’s government not to take sides.

‘He also said more work was needed to be done to repair ties between Canberra and Beijing, offering no indication when bans on Australian exports could be ended or when detained Australians freed’.

(An Aussie lady is now in jail in China for 23 months for nothing much and the jailers will not even pass on drawings by the lady’s children.)

There’s more, colleagues, and other sad stories like this.

AFR, August 11, P 43, John Kehoe, ‘In sync’ interest rate increases are uncharted waters’.

‘Central banks are tightening monetary policy in unison. That robs the international economy of variations that might offset future ups and downs.’

RBA governor Philip Lowe’s statement after its monthly board meeting last week noted the international uncertainty facing the slowing world economy, not only from Russia’s invasion of Ukraine, COVID-19, containment in China and falling real incomes, but also ‘tightening of monetary policy in most countries’.

‘There is a very narrow path for central banks to contain inflation without doing too much damage to employment.

‘Much of the inflation was initially due to supply-side shocks, which are lingering longer than expected, including transport and logistics interruptions stemming from China’s restrictions, the energy price spike and labor shortages. The US and Britain lost millions of workers, perhaps due to early retirements or concerns about catching the virus. Australia missed two years of immigration, leaving a smaller pool of available workers.

Supply will be permanently restricted compared with the pre-pandemic path, so central banks must tighten policy to cool overheating consumer demand.

This is a fine article, well worth a careful reading.

AFR, August 11, P1 and P4, Phillip Coory and Georgie Moore, ‘Skill pledge to clear way for migrants’.

‘The Albanese government will boost migration at the October budget to help fill urgent skill and labor shortfalls as part of an emerging deal with unions for longer-terms policies to train Australians.

‘A grand bargain that will seek to address the concerns of business movement and the union movement will be a priority at the government’s jobs and skills summit early next month’.

AFR, August 12, Editorial&Opinion, ‘Albanese needs to be clear about jobs forum’s goals’.

‘To limit the damage, it needs to urgently relieve the inflationary supply-side bottleneck that’s eating into workers pay by pursuing an immigrant catch-up.

‘It must return to the enterprise bargaining envisaged by Paul Keating three decades ago as the way to a competitive, high-wage economy. It must recognise the budget repair needed after Australia’s biggest fiscal support, but also that raising taxes would simply crimp economic growth.

And, after acknowledging Australia’s productivity slowdown, it must commit to the orthodox pro-economics that have generated prosperity since Hawke and Keating reforms in the 1980s.

Unless Mr Albanese can get the 100 summiteers focussed this way , there is little chance they will come out with a plan for action or the collective will to see it through.

And without clarity the event always risks being hijacked, as seen in the ACTU’s attempt this week to use it for an overblown Corbynite agenda of renationalisation, punitive taxation, and controls on monetary policy and prices.

AFR, August 12, P 43, Phillip Coory, ‘Jobs summit must not be a festival of windbaggery’.

‘Treasurer Jim Chalmers wants ideas for the October budget. He will have to corral next month’s talkfest to generate a consensus on IR and labor shortages’.

‘Business leaders are already saying that the summit cannot afford to drift into a battle of competing wish lists’.


Fiona Prior is surprised by the sex comedy 'Good luck to You, Leo Grande'. More here.

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