Mode, a viable target is 6-7% in my view, in the current times. Certainly not double digit inflation. Over the long run 4-6% is ideal in relatively stable world. At the moment there is war, disease, famine, drought, flood, fire and over population adding to risk. Is this transitory?
In a simplified sense, without getting into modelling, inflation is a necessary thing in a price signaling system to give incentive to produce. Even modern command systems are using price these days to allocate resources because they are part of the global trade. Without rising prices (which is an expression of demand for product), producers have little incentive to produce because profit is diminished and stocks will be run down. So, if there is a prospect of profit and an ability to source primary or intermediate goods used in production before the next price rise due to time lags, then profit margins can be further increased and business can remain ahead of the game when there is relative stability in the world. This means people can be employed and whether it is consumer spending or capital expansion, the expenditure will call forth further production and generate economic growth. This also increases the tax base so that transfer payments can be used to fine tune the general welfare of everyone, including companies through government grants. The prospect of profit for SPQ is the doubling of the copper price in the next couple of years.
I think we need to analyze the the type of inflation and the time lags between cause and effect. It is understanding the time lags where the smart money moves in for position and structural change. Global trade has been turned on its head. The Euro and Stirling have had rapid declines and serious inflation. The only currency that seems to be shining is the US dollar which is also sucking up spare global cash. Defence led recovery? That is not so bad because we are better placed than our trading partners.
Australia is no longer a manufacturing country. This may change as the need for self reliance has registered. However, we do import intermediate goods for manufacture and assembly and because of the downturn elsewhere and in relation to exchange rates, the net effect that is likely, is a reduced import of inflationary pressure. On the other hand we will see increased direct investment from the US because of critical mineral shortage which is advantaged by their purchasing power. We will also see Britain and Europe doing the same thing but for a different reason, because critical minerals are necessary goods for them to avoid reliance on Russia. All of this will lead to economic growth here, to accommodate inflation over the long run. So, timing to position personal capital is important.
At the moment our banking system is paying off debt to the US because we borrow from the US, hence interest rate rises here to cover costs plus by our banks to maintain their margins but not to the same degree as the shock and awe tactics that is embedded in the American psyche. Because we have low unemployment and commodities are assisting our banks through circular flow of funds, the need to raise interest rates are not as pressing, relatively speaking, as they are overseas. This reduces cost inflation here, despite the crush on sentiment by government and the media. There is certainly mixed messages.
Given the rising inflation in Europe, they will be forced to raise rates significantly which could reduce the flow of funds to the US dollar which has been spiking its price. If that comes off, gold goes up. However, there is pressure on the gold price because of Russia and China who back their currencies with gold. Say no more.
Tough times for many, but like as it was in the last financial crisis, Australia did shine and avoided recession through our exports despite the fear that was pedaled at the time. This is the message from the OECD projections too. The say Australia will not go into recession. Farmers also add considerable benefit to Australia, and while there has been flood and fire in recent times the season across the country as a whole has been good. The wheat belt in WA is no longer in drought. Australia can take up gaps in the wheat market because of the Ukraine conflict. We are the lucky country, but it could be better if it was managed better and value added by manufacturing here utilizing vertical integration. Time to stop selling off the farm and escape the Australian cringe that we are not good enough.
Expand
(20min delay)