Bill, I meant what I said - garden variety inflationary pressures (as opposed to inflation) for the reasons previously stated.
But what is garden variety inflation?
Well, as you know the RBA aims to keep inflation at between 2-3% over the course of the business cycle (refer to the: Second Statement on the Conduct of Monetary Policy).
Of course, that does not meen that inflation can't go either below 2% or above 3% - it simply means that the longer term average is to be somewhere in the 2-3% band.
(And you can see by looking at Graph 1 that since the target was introduced, inflation has, at times, gone above 3% and below 2% (the major spike in 2000 was associated with the introduction of the GST).
Is this garden variety inflation?
It could be rightly argued that 2-3% is "garden variety inflation", but I would disagree.
Personally, inflation in the order of 5-6% is what I would consider "garden variety" with no cause for concern.
Why 5-6%?
A target of 5 - 6% inflation over the business cycle would allow for much more economic growth than the current 2 - 3% band does. Growth in real GDP is good for all of us - with few exceptions it means more job opportunities and higher incomes.
Why not higher?
Much higher than that and transactions costs associated with checking prices and changing price lists become too much.
Also consumers face increased search costs as human nature dictates that when they see rising prices they ask themselves "am I being ripped off here? and they go looking to either find a better deal or confirm that they aren't being ripped off.
Why not lower?
Again, in my opinion, constraining inflation below 5% or so really does involve kneecapping the economy every time in starts to canter, for fear it might actually break into a run.
Some, short, concluding comments on inflation
Inflation is not bad - though it has been demonised (alot) in recent years (as much for political reasons as anything else).
It also is important to realise that inflation, per se, is not neccesarily a sign of bad economic management. It is to be expected that growing economies have inflationary pressures and, within reason, those pressures should be tolerated.
To summarise my two main points:
1. I am of the opinion that Australia currently faces little more than "garden variety inflationary pressures".
2. I believe that garden variety inflation is between 5-6% and that the 2-3% band the RBA is currently bound to (over the course of the business cycle) is lower than that which I believe is reasonable.
As posted previously, I just don't see the pressures for that sort of inflationary pressure at the moment.
I especially don't see the prospect that such pressures could somehow escape the radar of the RBA and that they would be caught on the back foot. I know it happened in the late 80's but, as I have said many times before, lessons have been learnt by both the RBA and Treasury.
While I may not agree with everything the RBA does I cannot think of anyone else I would rather have at the helm than Ian McFarlane. He really is exceptional at what he does.
MB
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