An Early Lent


As we are now learning, it’s all too easy to get into trouble in the age of unchecked credit. The United States did it through reckless lending, and Australia has done it to a lesser extent by overspending.

In both cases, the road out will be long, hard and bumpy. Recent rollercoaster rides on world stock markets have already made that clear – and there are more to come.

The month of repentance for our credit card sins is also upon us. Postal officers from Albany to Cairns are now stuffing letterboxes with credit card bills detailing long lists of purchases we put on plastic before Christmas. This is indeed a sobering time.

Lent is starting early this year, both for Catholics and the cashed out. The Australian Bureau of Statistics tells us that Australians spent 8.1 per cent more in the nation’s shops last November than we did a year earlier – even though average weekly earnings rose by just 5 per cent and our gross domestic product (that is, what we earn as a nation) rose by just 4 per cent. Meanwhile, our personal debt levels leapt by a massive 14.5 per cent, not including housing.

So perhaps there is a penitential symbol in the fact that Ash Wednesday, the day Lent starts, falls on 6 February this year – just one day after the Reserve Bank board meets to review interest rates.

It’s no secret that Reserve Bank Governor Glenn Stevens’s trigger finger is very itchy right now. The Governor is simply not in the mood to follow US Federal Reserve Chairman Ben Bernanke’s example and cut rates.

Normally, Stevens allows a bit of slack, particularly on what the Bank calls "volatile items", like fuel and food prices. But not this time.

In a recent speech, Stevens warned that the Bank now has to consider the extent to which price rises like these are taking a more permanent place in Australia’s inflation picture.

Thanks to Sharyn Raggett

At first glance, that picture might not look too bad. The most widely accepted measure of inflation, the Consumer Price Index, showed an overall rise of 0.9 per cent in the final three months of last year. Its annual inflation was just 3 per cent, within the Reserve Bank’s target of 2-3 per cent inflation over the course of the business cycle.

So what, as Margaret Whitlam once famously asked, is "all the hoo-ha" about?

Well, the Reserve Bank doesn’t use the CPI, directly, to set interest rates. It uses what it calls the "weighted median" and the "trimmed mean" instead – calculations the Bank makes itself, based on the CPI. And at 3.8 and 3.4 per cent respectively, the weighted median and trimmed mean are, as Chris Richardson of Access Economics has noted, "ugly figures".

Especially since producer price figures, which the Bureau also released recently, show very clearly that inflationary pressures, which have yet to show up in the CPI, are running at very high levels.

In short, there is worse to come on Australia’s inflation front.

Remember, too, that the Reserve Bank always tries to guess where inflation is likely to be in 12 to 18 months’ time. That’s its basic starting point when it sets rates.

So do you want the bad news, or the even worse?

In a very real sense, Australians can expect even worse times ahead if the Reserve Bank decides not to raise rates next month, than if it does. To a young family struggling with a big mortgage, that might seem like a heartless assessment.

But think of this. If the Reserve Bank does leave rates on hold, it will be for only one reason: because its economists, who are among the best in the country, would have come to the conclusion that the contagion is now so bad that the Australian economy is already facing the spectre of a sharp downturn.

That is, bluntly, that your job might well be at risk, not just your capacity to repay your home loan.

So just how bad is America’s plight? And does it matter to us anyway? Well, as one economist has said, things get grim when the public’s faith in a nation’s banks is shaken and house prices fall sharply, wiping out the wealth of millions of families. Those things have both happened already in the US, and sharp cuts in interest rates won’t solve them.

The Prime Minister insists that Australia’s fundamentals are still strong – and Access Economics is arguing that the US downturn might not matter too much to Australia anyway. The forecaster says domestic demand in some of Australia’s biggest trading partners, particularly India and China, might well take up any slack caused by reduced demand from the US.

That’s appealing. Living standards in both India and China are still well below those of first world countries like Australia, so the capacity for a little catch-up is there.

But what about the confidence? Those roller-coaster rides on world share markets over the past week or so have been just as exciting in Asia as they’ve been in New York, London, Paris or Sydney. Investors in Asia and on the Indian sub-continent clearly have been alarmed by spectres every bit as big and terrifying as any that has appeared on Wall Street.

Launched in 2004, New Matilda is one of Australia's oldest online independent publications. It's focus is on investigative journalism and analysis, with occasional smart arsery thrown in for reasons of sanity. New Matilda is owned and edited by Walkley Award and Human Rights Award winning journalist Chris Graham.