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Is There A Difference Between Inflation & Rising Costs?

Inflation is defined by dictionary.com as “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency”. While we have had tax cuts in this country and government surpluses these have not had a dramatic effect on the money in supply nor the value of the currency.

Generally speaking the inflation argument revolves around supply and demand in a pure economic, free market model. Of course, no such thing in reality exists because markets are manipulated by a whole series of stakeholders (eg – Media, investors, government, corporations and interest groups) and distorted by a range of forces – some uncontrollable like the impact of natural disaster for example.

Unlike the period up to the 1980’s where demand pressures really could get a long way out of sync with production capacity in many if not most sectors, the nature of modern globalised production techniques has meant generally speaking if there is demand it can more often than not be met. Indeed this has led to decade long deflation in most sectors. But the tide has changed in several key areas where capacity and the forces affecting capacity are having a dramatic effect.

Two of the most difficult inputs that central banks are wrestling with are how they deal with food inflation and energy costs in a world where food yields are on the decline and the pressure to change energy inputs is increasing costs. Is this really inflation or is it a massive re-adjustment phase that will see costs rising with little or no increase in domestic demand?

In a world where household costs in these two important areas has nothing to do with rapidly growing, glutinous consumption in domestic markets, is lifting interest rates really anything more than adding insult to injury? Or are high interest rates a way of protecting the value of the Australian dollar because if that dropped we’d be really stuffed?

Should food and energy costs be considered outside of the normal cluster of inputs used to calculate inflation?

From every piece of available information I have read in recent times, energy costs will continue to rise. Check your household electricity costs for the last two years. I did. My energy consumption (kilowatts) has gone down since I installed more energy efficient lighting and other devices but gone up dramatically in cost (dollars). That trend will accelerate as energy companies invest to switch to more environmentally sustainable production and pass on the costs.

The same is true of food. At the recent World Retail Congress securing continuity of food supply was a major discussion point in a world where production yields are down. As one of the critical drivers of GDP, retailers need to have a view on inflation and monetary policy. So, do you see a difference between inflation and rising costs?