Australia's Inflation Rate Rises to 4.2%
Why is inflation rising now, and what is driving it?
The official figures only reiterate what everyone who does the grocery shopping, or lines up to buy petrol already knows - prices are obviously rising.
Inflation is affecting the basic necessities of life, especially food, rent and fuel. What’s more these price rises are inescapable because they are in the basic necessities, and the cost of living, rather than in some luxuries.
Why is inflation rising now? A range of factors are involved, many of which are related to the global economy. Inflation is not just on the increase in Australia, but also inflation is up in many countries, such as Europe, China and the United States.
One of the biggest drivers of this inflation has been increasing petrol prices. Issues such as petrol prices are determined by two main factors. The first is the world price for a barrel of oil, which has been rising steadily for years, and shows no signs of dropping. More and more cars are being sold in countries such as China, India, Russia and the Middle Eastern countries. As the demand for oil grows, the price tends to go up.
The actual demand for oil is now rising much faster than any new supply can be found, creating price rises and possibly future oil shortages. Older oil fields such as those in the North Sea and in Mexico are producing less oil per year. As the price rises and rises, alternative fuels become more cost effective, but there will be a period of years before such alternatives can be found.
It has been mentioned by experts that the price of oil will jump to $125 USD by sometime in 2008. This includes experts in the field, such as T Boone Pickens (a legendary Texas oil man with a good track record for predictions). This figure does not allow for any further security crisis between Israel and Iran. So not much price reduction is likely on the world oil front.
The second factor in determining petrol prices is the level of tax the government applies to each litre of petrol you put in your car. The take is currently about 50 cents per litre, and that rises as the price of petrol rises. The level of tax on petrol is lower in Australia than in the UK or Europe but higher than in the US. The government has a huge revenue source at each petrol pump and will not be inclined to cut its take.
Food has been a more silent riser but basics such as wheat, corn and rice have simply exploded in their wholesale prices in the last year. Rice has more than doubled in price over the past year on commodity markets.
One of the factors contributing to these food price rises includes the planting of corn and sugar cane for ethanol production in many parts of the world.
Planting crops for fuel instead of food has contributed to food inflation internationally. But the high oil price, rising world populations and a falling US dollar, which encourages speculation in agricultural commodities, are all involved in the food price hike.
The problem is far worse in developing countries within Asia where rice is the staple food, especially for the poor, who spend 30% to 50% of their income on food. There have been street riots in countries in Asia and the Middle East caused by these rises. Many countries have banned food exports, especially rice. Even in America, Wal Mart has rationed rice sales in some stores because large users were hoarding supplies.
The cost of food has far more political implications than even high oil prices, and government measures are likely in many countries to try to bring prices down. The restriction in exports will only be the first, with various incentives possible to encourage, for example, more land to be used for food production.
To date, governments and central bankers have spent their time trying to protect the banking system from the fallout from the subprime debt crisis. Political pressures from out of control food price rises and the resultant unrest and riots, may force the world’s governments to more seriously try to control food prices and the rising level of global inflation.
Inflation has been regarded as the lesser evil and some central bank actions, such as lowering interest rates in the United States, have only encouraged more global inflation. As the political cost of ballooning inflation rises, the political willingness to start to tackle the problem may also rise.
Since much of Australia’s inflation is imported, this is our main hope for bringing down the inflation rate.
May 1, 2008
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