Economies: AUS inflation upsets predictions

The Australian Reserve Bank is in a bind. It had hoped that the most recent increase in interest rates would have stifled inflation but not stifled growth.

But the reverse has happened. Growth has slowed, and there are signs that it will slow further. Many business leaders when interviewed in press and broadcast media are singing the same tune: expect a serious slowdown and possible recession starting as early as Q3 2008, and to last as much as 18 months.

But inflation figures out today show that the cost of living is rising quickly.

One of the major factors in the situation is commodity prices: with food staples in world markets jumping around 70% for soya beans and more for rice and wheat, the cost of ordinary shopping is rocketing, not just in Australia but around the world.

Some of the blame for this is being put into government stockpiling, but traders are doing the same in countries such as The Philippines, where rice is in extremely short supply and the price has increased, in some districts, by 300% so far this year. Other governments are trying to calm the situation, but in order to protect their own countries are accumulating stocks in anticipation of a shortage. Also blamed are speculators who are trading in derivatives - with the price of futures increasing significantly.

All of this is overlaid with underlying cost inflation: as oil rises towards USD120 per barrel (an unthinkable figure even a year ago, but a figure that came within easy reach after Hilary Clinton's comments earlier this week that under her Presidential rule there were circumstances in which Iran would be "obliterated," and implying that she intended not just to take power but to hold onto it for ten years.

The collapse of the US dollar - which is now within striking distance of parity with the Aussie dollar has mitigated some of those costs for Australian consumers but if the USD recovers, then Australian inflation will have to come to terms with rapidly rising fuel costs.

Overall, although Australia - a country with only some 20 million people - punches well above its weight in commerce across the Asia Pacific region and increasingly into India, there is no doubt that the problems are highly complex and there are no easy answers as to how to stabilise an economy which has become such an integral part of the region that it can no longer operate in isolation.