Monday April 07, 2008

Australian CPI inflation holds at 2-year high of 4% in Mar 2008

bloomberg.com :

An index measuring Australian inflation held at the fastest annual pace in almost two years in March, reinforcing the central bank's decision to increase borrowing costs to the highest in 12 years. Consumer prices surged 4% from a year earlier, breaching the 3% limit of the Reserve Bank of Australia's target range. More expensive financial services, food, gasoline and property rents drove prices higher. Central bank Governor Glenn Stevens increased the benchmark interest rate by a quarter point to 7.25% on March 4, the fourth increase in seven months. The government reports its official inflation measure, the consumer prices index, on a quarterly basis.

- This proves that even a "strong currency" may be no match for the rising tide of global inflation. From the 3-year chart above, via xe.com, it can be seen that the Australian dollar (AUD) has been rising sharply against the US dollar (USD). The AUD/USD forex rate has moved from the 0.70 to the 0.90+ range and is almost at parity with the USD. If this sounds familiar, it's because their case is very similar to the Canadian one - a rising currency backed by rising commodities, as both countries are major producers of natural resources. Yet, despite having a strong a currency as there can be in today's world, and despite successive rate hikes by the central bank to reach a whopping 7.25%, inflation in Australia is at a 2-year high and chances are quite good that it will be going up further.

Therein lies an important lesson for governments like that of Singapore who are counting on currency strength to help ward off inflation. My take is : don't bet on it. All currencies are going down in a race to the bottom (ie zero value) - it's just a matter of which one falls slightly faster or slightly slower than the others. With major central banks pumping their money supply at double-digit rates, relative currency strength is just an illusion.

Sure, central banks such as Singapore's MAS can let the currency appreciate a few percentage points higher than say the USD, but the limits of this policy are readily apparent when you look at a 2-year crude oil chart and notice that crude oil prices have more than doubled. In order to not let the crude price rise affect us that much, the SGD/USD forex rate would have to hit parity and then some. But if that is done, our exporting companies will crash so fast that they will leave a steaming crater in the ground. What I can tell you is this : the governments' hands are tied. They can no more fight inflation than a guy with a bucket and a shovel can fight a raging forest fire.

(2008-04-07 14:16:33 SGT) [Biz] Permalink

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