This is from a speech by Stevens to a private Treasury seminar on 11.3.08.
Full copy here
Personally, I am blown away....In the passage below Stevens admits if rents, loan facilities and petrol were stripped out of CPI calculations, CPI for the year ending Dec07 would have been 2.1%.....he then tries to refute stripping these factors out is valid, which he doesn't do......
Someone should point out that previous rate rises (in addition to sub prime) did drive rents and loan facilities up, and oil price rises are extrinsic to internal demand.....
I am flabbergasted at his lack of logic and this snow job.....who is this guy and where did he come from?????
Monetary Policy and Inflation: How Does it Work?
Glenn Stevens
Governor
Remarks to the Australian Treasury Seminar Series
Canberra - 11 March 2008
.......................People have also pointed out the prominent increases in rents in the CPI as a special factor, and it is certainly true that rents are rising quickly. The reason that is happening is pretty clear too: there is strong demand for that type of accommodation, and rents as a yield to the supplier have been unusually low. Hence, rents are bound to rise.
Interestingly, this shows the lengthy and rather complex connection between asset price changes and consumer price inflation. A key factor behind rental yields being very low was that the price of residential property rose so strongly – far faster than rents – in the earlier part of this decade, and has stayed high in most places in the country. While capital gains were occurring, it mattered little to many investors that rents as a running yield were low. But this was not sustainable. Once capital gains slowed, the low rental yield mattered a great deal. Low yields also prompted more demand for rental accommodation than otherwise. That combination was bound to lead to an adjustment in rents, unless property prices actually declined to restore the yield. Since, in most locations, they did not, an adjustment something like the one we now see became very likely. It seems likely to continue for a while yet, until either rental yields regain more attractive levels or some other factor raises the effective return for investors.
Suppose, though, that we did take out some of the ‘special factors’ that people nominate. Let’s, for the sake of argument, remove from the CPI rents and petrol, as well as the calculation of deposits and loan facilities. If we do that, the rate of inflation of the remaining items over the year to December 2007 is 2.1 per cent. No problem, right? Well, not exactly.
To assess the trend in inflation objectively, you cannot just take out items that rise in price, which is why we typically use underlying measures, which trim both extreme rises and falls. Suppose for the current purpose, then, that we also remove fresh fruit, as a very volatile item and one that happens to have held down the CPI over the past year, due to the unwinding of the great banana episode of 2005/06. Let’s also remove the effects of the child care rebate changes, treated as a price fall in the CPI, but which we know is a one-time effect and which reduced the CPI by 0.2 per cent...................
Full copy here
Personally, I am blown away....In the passage below Stevens admits if rents, loan facilities and petrol were stripped out of CPI calculations, CPI for the year ending Dec07 would have been 2.1%.....he then tries to refute stripping these factors out is valid, which he doesn't do......
Someone should point out that previous rate rises (in addition to sub prime) did drive rents and loan facilities up, and oil price rises are extrinsic to internal demand.....
I am flabbergasted at his lack of logic and this snow job.....who is this guy and where did he come from?????
Monetary Policy and Inflation: How Does it Work?
Glenn Stevens
Governor
Remarks to the Australian Treasury Seminar Series
Canberra - 11 March 2008
.......................People have also pointed out the prominent increases in rents in the CPI as a special factor, and it is certainly true that rents are rising quickly. The reason that is happening is pretty clear too: there is strong demand for that type of accommodation, and rents as a yield to the supplier have been unusually low. Hence, rents are bound to rise.
Interestingly, this shows the lengthy and rather complex connection between asset price changes and consumer price inflation. A key factor behind rental yields being very low was that the price of residential property rose so strongly – far faster than rents – in the earlier part of this decade, and has stayed high in most places in the country. While capital gains were occurring, it mattered little to many investors that rents as a running yield were low. But this was not sustainable. Once capital gains slowed, the low rental yield mattered a great deal. Low yields also prompted more demand for rental accommodation than otherwise. That combination was bound to lead to an adjustment in rents, unless property prices actually declined to restore the yield. Since, in most locations, they did not, an adjustment something like the one we now see became very likely. It seems likely to continue for a while yet, until either rental yields regain more attractive levels or some other factor raises the effective return for investors.
Suppose, though, that we did take out some of the ‘special factors’ that people nominate. Let’s, for the sake of argument, remove from the CPI rents and petrol, as well as the calculation of deposits and loan facilities. If we do that, the rate of inflation of the remaining items over the year to December 2007 is 2.1 per cent. No problem, right? Well, not exactly.
To assess the trend in inflation objectively, you cannot just take out items that rise in price, which is why we typically use underlying measures, which trim both extreme rises and falls. Suppose for the current purpose, then, that we also remove fresh fruit, as a very volatile item and one that happens to have held down the CPI over the past year, due to the unwinding of the great banana episode of 2005/06. Let’s also remove the effects of the child care rebate changes, treated as a price fall in the CPI, but which we know is a one-time effect and which reduced the CPI by 0.2 per cent...................
