Price pressures soar

New figures confirm fears that price pressures have been rising sharply in Australia.

At the basic commodity stage, for example, producer prices rose by 1.5 per cent in the final three months of last year and by a massive 4.7 per cent over the year.

Developments like this clearly threaten the Reserve Bank’s stated aim of keeping Australia’s inflation in the 2-3 per cent range, over the course of a business cycle.

The bank’s chief, Glenn Stevens, admitted in a speech he made on Friday, that the authorities had, in the past, tended to discount so-called volatile items, such as oil and gas prices and the cost of refining petroleum which dominate this indicator.

However Mr Stevens also warned then that present circumstances are forcing both the Reserve Bank and its counterparts overseas to reasses all that. The question now, he said, is whether these developments will become permanent, and therefore more dangerous to the economy.

That is no light judgement. And we will all see what Mr Stevens and his board have decided about all this, when they meet on February 5.

Most analysts now expect an immediate rate rise, that day.

The drought, with its consequent rise in food prices, also contributed to the increase in stage one producer prices, that the Australian Bureau of Statistics reported today.

Upstream processing price rises were more moderate. They increased by just 0.6 per cent in the December quarter and 2.8 per cent over the 12 months to the end of December.

The bureau also reported today that both personal lending and commercial finance continued at high levels in November.

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PM sets his agenda

The Prime Minister Kevin Rudd set the agenda for his new government, at a business breakfast in Perth this morning.

He told those attending they could expect sharp cuts in government spending, fresh incentives for savings and moves to get more people into the worlkforce.

His promise to tackle Australia’s skills shortage is particularly attractive to W.A. businesses. They have been struggling to overcome skills shortages for many months, as a result of the State’s mining boom.

Mr Rudd’s promise to clear bottlenecks, while cutting Federal spending, appears to rest on basic contradictions.

Better port, rail and road facilities usually require extra government spending.

That implies that cuts to other Federal spending will, in all likelihood, be much deeper than previously expected.

That, too, was made clear, by implication,  today when the Treasurer, Wayne Swan, told ABC radio that the government would proceed with its staged tax cuts, worth some $31 billion, despite its severe spending cuts.

Predictably, Mr Rudd  also attacked his predecessor, John Howard, saying the outgoing government had done little, if anything, to contain inflationary pressures in Australia.

He won’t be able to get away with that kind of talk much longer.

Mr Rudd did not spell out all that his government will do to curb inflation, although he has now signalled that this is is his top priority.

Full details won’t be made public until the government’s first budget in May. Unless, of course, it sees value in some well placed leaks, beforehand. As it did over the weekend that has just passed.

Tighter times ahead

Federal spending is to be slashed and interest rates will rise.

That’s the tough prospect Australia faces, as the government and the Reserve Bank work together to curb inflation.

The Prime Minister Kevin Rudd plans to explain his strategy to business leaders in Perth today.

He is aiming for a surplus of some $18 billion, even though he will still proceed with the staged, $31 billion of tax cuts that he promised before last year’s election.

That can only mean one thing, in the present circumstances. That is big spending cuts.

There is plenty of room for that. Despite its small government rhetoric, the Howard government was both a big taxer and a big spender. The slices of GDP it took in taxes – and then spent – made even the Whitlam government look pale, by comparison.

Rudd’s cuts are likely to trim the Federal public service, in particular. The Department of Foreign Affairs and Trade may well be a particular target.

It will, however, fight back. The government is keen to increase Australia’s exports to both India and China. It will need its own people on the ground, in both places, to do that.

Meanwhile, the Reserve Bank Governor, Glenn Stevens, has signalled as clearly as he can that further interest rate rises are needed, possibly as soon as February 5, when the bank’s board next meets.

He did that on Friday. London time, in address to expatriate Australian business leaders.

Mr Stevens said he did not like the pattern of price rises, that is now appearing in Australia.

“Prices for foodstuffs, energy and raw materials and for industrial processes are quite high,” he said.

“The synchronised nature of the increases has been quite marked, as well, in a fashion eerily reminiscent of the early 1970s.”

Hints don’t come much clearer than that.

Mr Stevens let all who are interested know, in the most forceful way possible, that the Reserve Bank now has its eyes firmly fixed on inflationary pressures in Australia.

And it is not content to stand idly by, hoping that a slowdown in America will kill inflation in this country.

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Sunlight still the best disinfectant

Investors are – predictably – taking tougher attitudes to offers of Asset Backed Commercial Paper.

That is a natural product of the US sub-prime mortgage crisis.

The Reserve Bank tracks the development, in an article it published yesterday in its monthly bulletin.

It notes that ABCP investments still have advantages.

“Notwithstanding the recent difficulties in this market, ABCP, like other forms of securitisation can allow financial institutions to diversify their sources of funding ,” the bank said.

It also said that these instruments also enable credit risk to be packaged and sold to meet the preferences of investors.

But, to put it mildly, there are issues, too, as the bank noted.

“Recent events have, however, highlighted a number of issues that are likely to receive ongoing attention.

“One of these is the important role of transparency in the smooth operation of the market,” the bank said.

It said investors are now reluctant to roll over these short term instruments, because of what it called the “opacity” of the market.

Obscurity, that is, both in the composition of asset pools, backing ABCP and in the lack of publicly quoted prices.

Putting it simply, the bank said investors are now demanding more transparency in this area.

As the late Ralph Jacobi MP used to say, about such matters:” Sunlight is the best disinfectant.”

www.rba.gov.au

Uranium:India’s crouching tiger

Fighting for great causes is glorious – while you are in opposition. The consequences can be a little troubling, though, if you wake, one day, in government.

Things are a bit like that, right now, for Labor. The South Australian Labor Premier, Mike Rann, wants to boost his State’s already impressive endeavours in uranium exploration and production. And he specifically included India, when asked to identify countries likely to increase their nuclear power output.

So far, so good. But that put Australia’s new Foreign Minister, Stephen Smith,on a sticky wicket in Perth yesterday, when he visited the cricket, with an Indian friend, Shyam Saran, who is also an envoy of the Indian Prime Minister.

Unlike its neighbour, Pakistan, India has a good record on non proliferation. As Mr Saran happily noted, it hasn’t allowed its nuclear secrets to leak. But India hasn’t signed the Nuclear Non Proliferation Treaty, either. Nor is it likely to do so.

That leaves Australia in a bit of a spot. Likely, that is, to miss out on sales it wants to make to India. Especially as its denial, of such an important resource,l are weightier in semantics than reality.

There another point of of embarrassment for Australia in all this.

The previous government, of Prime Minister John Howard, agreed “in principle” last year to sell uranium to India. On the usual “strict conditions,” of course.

Mr Smith has now announced that the Rudd Labor government will reverse that decision.

That’s not a particularly good look, especially with Australia’s Trade Minister, Simon Crean, now in India, on a trade boosting mission. Especially after that recent unpleasantness, after an earlier cricket match.
The financial wire service, Bloombergs, ran the story last night with a suitable touch of disappointment, emphasisng that word “reversing.”

Once again, not a good look for Australia, which has the world’s biggest known uranium reserves.

Winning elections is wonderful. But it does present problems.

The West – going West?

West Australians have been celebrating the State’s boom in great style, but the question now is can it last?

The spectre of a US recession is making that question urgent.

WA doesn’t sell much directly to the United States, but its big customers, Japan and China certainly do.

And there’s the rub.

There’s been hopeful talk suggesting that growing domestic demand, in both of these countries might fill any shortfalls they might face in US orders.

But that’s just what it is, at this stage. Talk. No more than that.

The West Australian Chamber of Commerce and Industry reports that spending on hospitality and services in the State rose by a massive 6.7 per cent in November.

To put it another way, West Australians spent an extra $18.5 million on those items that month.

That is, certainly, starting the party season in great style.

And why not? West Australians have a lot to celebrate, right now.

At 3.4 per cent, their unemployment rate, is significantly below the national average of 4.5 per cent.

The State’s total employment rose by 3.1 per cent over the year.

As other Australians decided to seek their fortunes by going West, in the June quarter of last year, the State chalked up a net gain of 1,355 from net interstate migration.

But that was swamped by the 5.642 migrants who arrived from other countries in the same time.

That was beginning to look like those of the old goldrush days, when the Golden Mile, between Kalgoorlie and Boulder, shone like a beacon to the world’s young and ambitious.

Over the same brief period, the State’s net gain, from overseas migration, was no less than 5,642.

Once again, too, they came for the money.

Average weekly earnings in the State rose by 5.7 per cent in the 12 months to the end of August and that, once again, was significantly above the national average of 4.9 per cent.

Established house prices rose by a relatively modest 2.8 per cent in Perth, over the 12 months year. Who, though, would be surprised at that after they had risen by a almost 50 per cent, in the previous 12 months.

The State’s exports, particularly in times of drought, are overwhelmingly mineral based. And, despite the boom, it’s economy is still relatively thin.

All this means that any significant cut in still booming iron ore orders, from Japan and China, could bring the State’s boom to a very sharp halt.

Financial advice for Aborigines extended

The new Labor government is to extend a service which provides basic financial help and  advice  to  Aboriginal  communities.

The service, known as income management, will be available from today in the Alice Springs town camps or Ingerreke and Amoonguna.

The Minister for Families, Housing, Community Services and  Indigenous Affairs, Jennny Macklin, who made the announcement, said the program had already been well received in other  Aboriginal Communities.

“People understand why it is important to have half of their income support payments protected, so that money is used on essential items such as food, rent, medicines and utilities,” she said.

Ms Macklin said Centrelink had already stationed officers in the Alice Springs communities and camps.

They had conducted individual interviews with community members.

The aim was to help their clients understand what income management means and where their money goes.

“Income management is extremely important in helping families manage their government payments to cover essential items and, importantly, also provide for the wellbeing of their children,” Ms Macklin said.

The Labor government picked up the initiative from the previous Howard government, which was worried about the habit of some Aboriginal men, who pooled their social security payments to buy alcohol, instead of meeting their families needs.

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