Aussie inflation - interest rate increases are not the answer!

CPI in Oz has blown out to over 4%. That means you have to knock 4% off rates of return to work out the real rate of return.

There is still talk of futher rate rises. I doubt it. Reserve Banks use monetary policy to soften or stimulate demand. As demand increases or decreases, so move the inflationary tendencies in the economy.

So inflation is high, so interest rates must go up right?

No. There are from time to time other causes of inflation.

Most of Australia's inflation is on the supply side in staples (things we must buy almost regardless of price) rather than discretionary ( things we can do without if we have to).

Key drivers of current inflation are:

1. rent (we have to have places to live; rents are up more because of low supply than excessive demand; raising interest rates won't stop people looking for places to live).

2. oil prices (again this is supply driven mainly - raising interest rates is unlikely to stop us buying petrol)

3. food, esp. fruit & veg (raising interest rates will not stop people buying food although maybe we will cut back on our fruits and veg)

4. healthcare (if we are sick we will go to the doctor, if we need high blood pressure pills we will still buy them - maybe we will cut down on the viagra but raising interest rates will not stop most people buying their medication - I hope)

The things currently driving inflation are not that closely tied to consumer spending, thus it would be a mistake to raise interest rates further despite current inflation levels.

I think the board of governors of the RBA are wise enough to realize this. Lets hope.

I don't think we will see any rate cuts for awhile but if they use their heads, they won't raise rates at the moment either.

The economy is in grave danger and its now not the consumers fault.