2007-07-25

Australian Inflation at 2.1% (annual)

So says the SMH.

The good news is that, historically, these inflation figures are light years better than anything we experienced post-1965 and pre-1994. Monetary policy - specifically the role that central banks have in controlling inflation via interest rates - continues to show that it is an effective way to level out the peaks and troughs of economic growth and keep the value of money more or less constant throughout different economic situations.

The bad news is that the 2.1% annualised figure is on the wrong side of the line for the Reserve Bank to reduce interest rates. If anything, the figure is more likely to encourage the Reserve Bank to raise rates in the future. Anyone who is hoping for interest rates to fall in the short-medium term should be quite disappointed.

One last thing - the 1970s showed economists that there is actually no "trade off" between inflation and unemployment. By focusing solely upon keeping inflation low, central banks make medium-long term employment conditions more favourable than if they decided to let inflation "run" a bit in order to boost employment levels.

But, then again, I'm one who argues that monetary policy should be even stricter.


1 comment:

Ron Lankshear said...

Would you have a spare half a crown for a cup of tea