Inflation is approaching concerning levels in Australia.
Inflation is a result of an economy running beyond its capacity.
Australia has not been able to respond to terms of trade booming due to massive capacity restraints.
We cant hire enough skilled workers due to lack of training and a delayed immigration response. We haven't spent money on simple stuff like communications, rail and ports.
The floating currency has assisted as a shock absorber but at some level this will become less effective.
Contemplate a Yuan revaluation increasing costs of Chinese imports or a fall in commodity prices reducing demand for the AUD. If TVs (ect) that cost the same as 15 years ago join food and rents and rise by 4% annually - what happens to interest rates?
The strong AUD has shielded us so far from oil prices and imported inflation. But when the terms of trade flatten or fall, who wants to own AU?. We are as leveraged as the Yanks and have a far smaller manufacturing base. Our current account deficit is far beyond the previously fearful 6% of GDP despite our terms of trade being multiples of past levels.
This is frightening...
What happens to our CAD when copper, coal and iron ore drop 30%? Who would want to hold AUD when we have no ability to attract FOREX.
Whithout mining, what are we good at?
Property speculation and banking?
We are kidding ourselves...
If we begin to import inflation from our trading partners and the stuff we buy that is the same price as 10 years ago starts rising it is not hard to see 5%+ inflation.
The RBA will ramp rates as hard as they need-to in such a situation.
While I dont think they will reach the 20% rates of late 80s and 90s - contemplate the average Aussie paying off his $350K mortgage at 10% - let alone higher.
We have a market trading at extremely high PEs in the face of this risk and a bunch of pollies ready to pour more fuel on the fire with $30bn worth of cash and no real reform.
I am typically bullish by nature, but inflation worries me to the core.
Costello tells lies about his comfort in a 2% headline rate, but this is a false number. The same BS number exceeded 4% recently when the underlying was far lower and you can guess which number he chose then???
Anyone else contemplating interest rates 1%+ more than current due to inflation?