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Stay alert to inflation risks, warns deputy RBA governor

September 9, 2010

http://www.theaustralian.com.au/business/markets/stay-alert-to-inflation-risks-warns-deputy-rba-governor/story-e6frg926-1225907775407

“THE economy is now operating at close to full capacity and policymakers need to be alert to inflation risks, a hawkish RBA official says. The highest terms of trade in 60 years was fuelling an income surge and would keep unemployment trending lower, Reserve Bank deputy governor Ric Battellino told an audience in Brisbane today.”

Battellino pointed to a number of factors, especially a big increase in mining and non-mining investment and government plans for future infrastructure spending that would create inflationary pressures for the Australian economy in the future. For this year the RBA expects inflation to remain within the RBA’s 2-3 per cent target band. It is future years where the concerns lie.

The RBA has hiked rates six times between October 2009 and May of 2010, taking the cash rate target to 4.5 per cent but has held rates steady since then. “Nevertheless, the hawkish speech could shake some investors out of their complacency.” Future rate increases seem likely.

1. List the factors that the RBA says are putting Australia at risk of future inflation. Which of these are ‘demand-pull’ and which are ‘cost-push’?
2. What is the meaning of ‘capacity’ and what does it have to do with inflation?
3. Why do some regions of Australia have inflation rates below the national average and others above? How does this complicate RBA anti-inflation policy?
4. How should Australian fiscal policy support monetary policy to keep inflation contained?

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