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Is Inflation in Australia plummeting due to China?

February 25, 2011

 

The Billion Prices Project shows that Australia’s inflation problem may be going away.  Over the last several months, the inflation rate has declined a decent amount.

Do not take these numbers as gospel, but they are just one more way to look at what is going on in the world.  With the Australian Dollar above the Pre-Crisis highs, the high exchange rate will place some dis-inflationary pressures on the prices in that country.  Since Australia has run a balanced budget for a long time now, their domestic supply of currency isn’t putting much pressure on prices.

China allowing the Yuan to appreciate should push inflation pressures out to other countries.  But while that is happening for the U.S., it doesn’t seem to work like that for Australia. Due to the natural resource based trade between China and Australia, Australia is linked with economic activity in China in a very direct manner.  Any reduction in Chinese inflation – or even just a lower growth rate in inflation – will have similar and outsized impact on Australia.  Lower inflation in China reduces inflation in Australia too.

For the U.S., the relationship with China and inflation is likely to be a see-saw style relationship.  Lower inflation in China probably means higher inflation here.  Higher inflation in China means lower inflation here.  Just to be clear, the amount of inflation that China is absorbing for the U.S. is probably very low.

I included France in the chart to show the insanity of Axel Weber.

 

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