Inflation - RBA response?

yeah exactly, lucky 50% of borrowers didnt believe him and fixed their rates at <3% for 2 - 3 years... fixed rates have now skyrocketed in the last 2 - 3 months

 

I think I agree with quite a bit of your points, although the japan-trained economist in me would disagree with some of the nuances of your points on japan.

But it really is less straight forward than you argue. Note that all your charts are before the advent of inflation targeting, the foundation of which is to control expectations. Since that was introduced around the developed world in the early 90s, it’s no accident that we have had nearly 30 years of quite prosperous growth while inflation has remained under control, something we had struggled to do for decades before that.

but that system is dependent on responsible central banks that maintain the trust of the economic entities in their markets. Many of the cases you mention would not qualify for that description.

Money supply does matter. But there are just too many cases where it didn’t do what Friedman said it would to suggest it is the primary factor these days. Japan, everywhere after the GFC…, eurozone for last decade are obvious examples. We can’t just point to the last datapoint (inflation spiking in developed economies this time as opposed to developing countries without central bank trust) and call it a correlation let alone causation.

friedman assumed in his model that demand for money was stable. If that is wrong, the relationship between money supply and inflation breaks down. Recent history suggests it isn’t that stable. Similarly, velocity of money is far from stable.

bit surprised to get pushback on the idea of inflation expectations tbh. It’s quite well established as an economic principle these days.

 

haha, I think we agree on some points but on the point of money supply being the primary driver, I guess we gotta agree to disagree

Post GFC, inflation went into things the normal CPI doesnt capture.
During COVID, we paid people to not work. This cause a reduction in goods available, whilst simultaneously increasing the money supply. its not rocket science to understand if you reduce supply whilst increasing demand (printing and handing out money), prices will increase (although i note your point on money velocity, which is also important, but having said that, once inflation is bad enough, money velocity will also increase as noone wants to hold onto rapidly depreciating dollars)

"Reputable" Central banks, said this inflation was "transitory". After a lot of egg on their face, they retired that word as it became obvious that we have the worse inflation in 30+ years. And theres obviously a lot more pain to come. You dont fight 5 - 8% inflation with rates at 0.25 - 0.5%

The reason for my skepticism on inflation "expectations" driving inflation is because it doesnt really make sense. It is like saying, if enough people in the world "expect" the price of ferraris to decline by 50%, then ferrari will reduce its prices by 50%. Or if everyone in Australia "expects" the price of petrol to be 10c a litre, then the price will be 10c a litre. Literally makes no sense. It is central banks like to put out this propaganda, to blame inflation on external factors rather than blame themselves. However, again thinking this through, if central banks have the power to reduce (control) inflation, via quantitative tightening (and/or reducing the money supply) and raising rates, then the opposite is also true, namely, they cause inflation by quantitative easing (and/or increasing the money supply), and lowering rates.

You can run a mini experiment yourself playing monopoly. Play a game where you distribute the normal amount of funds to each player, and note how much each property on the board goes for (using the auctioning method). Then play another round, but this time playing with 10x as much money, and note how much each property goes for.

 

I actually agree with basically every word of the first half of your post, and nearly none of the second half!;-) that’s quite an effort by both of us I guess!

Expectations feed through many many things. Here’s some examples:
- pay rise requests.
- business competitor pricing expectations.
- fixed rent increase levels for commercial tenants.
- insurance policy premiums.

It’s not quite a case of just expecting the cost of your Ferrari to be half the price so it is, unfortunately. But you can bet the manufacturer will be planning their new model based on what they expect to be able to charge in a couple of years time when the next model hits the market.

I think the monopoly example is correct, to the extent that your first paragraphs are too (where you talked about reducing supply and increasing demand at the same time). But that example exactly removes the factors I mentioned that can invalidate Friedman theory - variations in the demand and velocity of model. Plying monopoly, people aren’t just going to save forever cause there’s nothing good to buy, or they think prices aren’t going anywhere so may as well just hold the cash for a while etc. your example shows the basic function correctly for sure, but not the nuances that create a japan.

 

These are my thoughts also. There are so many things that could happen around the world like war, terrorism, natural disasters etc that make any of these probabilities fall right away very quickly. I certainly do agree that as investors we need to be ever vigilant to the forces against us all the time!

 

I don't think it's that dire. Arrivals are at about 10% of what they were pre-covid but I think we'll see a steady increase.

I wouldn't write off China, but I'd agree that it's not going to immediately bounce back.

 

Sure increase will be steady... issue is by then Sydney/Melbourne/Brisbane markets would have retraced.

More articles on rates...this will affect sentiment...but again I believe we will be at 2-3% by the end of 2023/early 2024.

12ft |

 

Agreed on China - a lot of students may have half finished degrees, masters etc
And a lot of new students would have connections that have studied here.

Only thing is the current lockdowns in big cities in China?

Genuine academic students may opt for us/uk, but students with family wealth may just come for the lifestyle, language etc?

 

You can't even get out of China.. Shanghai is basically now live and sleep at your workplace, or stay locked in at home, and if no comply off to a "quarantine hub" / concentration camp. No ifs or buts. If you die you probably get shipped off in some van quietly to the countryside to be cremated in mass crematoriums. "Minimal deaths!"

Nearly all flights to/from China are cut to the rest of the world.

I guess when they finally let people leave their homes freely, they will be itching to leave that hell-hole which would be great for immigration.. but I'm sure China will see this coming and implement some zany new policy banning this also.

Crazy country.. it's going to implode in a big way.. breeding some angry, angry people.

They better get their **** under control, or this inflation/rising rates thing is not going away easily, because we have all become overly reliant on these guys for every little chip or part. Even if 95% of your product is non-China, it's that 5% China parts that are killing the rest of the world right now with inflation.

 

This is spot on...my concern is that China will export inflation...as there is still way too much reliance on China.

I reckon the next economic contagion will start from the 2nd largest economy in the world. Might be a good lesson for the world to diversify faster if/when this happens.

 

Good article for the non economists to understand impacts of inflation...

'Get on with it': Why the surging cost of living means interest rates need to rise soon

 

Re inflation

What we are seeing in China at the moment.

40"Hq containers dropped from $11,000USD down to $5800 USD
Also seeing 2-5% reduction in purchase prices.

We are also seeing more inventory with wholesalers than in the past 2 years.

Higher Australian inventory leads to lower prices at RRP.
Reduction in shipping cost over the last 4 months is very much welcome..we are still a fare way from the $1800USD the same container would have cost 3.years ago but definitely dropping no the on months.

What does this mean for inflation?

I feel the inflation will be high but the climb has slowed and will stop and start heading down.

RBA can make a huge mistake going hard with rates not keeping a good pulse at grass roots level.

 

In moderation, inflation is a good thing.

 

All well and good container prices are dropping, but no good if you can't actually get one.. how do you get a container to Australia right now? Never mind in 6 months when another country pays a higher price to get theirs? I don't think it's so simple...

The busiest container port in the world is closed. Here's what it means for Australia

 

Please no need to quote articles this is what we do for a living. Can't get out of Shanghai truck a few hours north and use another port added cost $550 USD as of today. This is our business and we have no problem getting 2/3 40"Hq containers per weekly into our facility. Next to us is Bathroom suppler for Harvey we talk daily again minimal issues simply higher costs. Delays at the moment are 2 weeks. We have similar delays dealing with the incompetence of Port botany .

Any good broker should be able to get you the stock out .

Many importers simply don't want to pay the current rate and delay hoping rates will come down.

 

answer was 25bp hike in May to take it to odd-35bp target. vs economist divided prediction of 15bp or 40bp hike

This means June should see a 40bp hike to take it a more normal 75bp even quarterly target rate.

 

most probably yes another 40bp in June. but many and many are predicting rate rise every month until Christmas. that is scary.

 

Well, sentiment in markets will fall a tad, not sure how this plays out in property prices yet.

Will there be a rush of people trying to get in while they can borrow as much as the bank allows or will it turn people off?

 

Students will now be able to work more in Australia.
Temporary relaxation of working hours for student visa holders

This is a really good policy meaning students can sustain them self while here.

To address workforce shortages, student visa work hours have been temporarily relaxed. This measure takes effect immediately for all ongoing students as well as new student arrivals, including secondary applicants. Students will be able to work before their course of study commences. They will also be able to work more than 40 hours a fortnight in any sector of the economy.

These temporary measures remain in place until further notice. Students must ensure they are aware of any changes to visa conditions, including work rights.

In addition, student visa holders who are outside Australia and arrive between 19 January 2022 and 19 March 2022 may be eligible for a refund of their VAC. Students can apply for a refund up until 31 December 2022. For more information on how to apply for a VAC refund see Getting a refund.




Does our government advertise thee policies overseas?

 

They don't need to,
Paid education is the easiest, cheapest and almost guaranteed pathway to citizenship,
Even if Unis triple their fees, there will hardly be a dent in demand.
Doubling the permitted work hours will now make it irresistible.