Friday, April 6

the low growth state of inflation

Australia's two-speed (well perhaps three-speed) economy is evident in a whole host of data. In the next chart we can see it in the through the year growth rates for State Final Demand to Q4-2011.

Tasmania and South Australia are in the doldrums. We have sub-trend growth in Victoria, New South Wales and the ACT. And the Northern Territory, Queensland and Western Australia are enjoying boom times. So I asked myself, where would I expect the inflation rate to sit in each of the jurisdictions (well their capital cities)?
Not quite what I had expected. The high growth states have the lowest inflation rates. Intuitively I had expected the higher growth states to have output closer to (perhaps beyond) their full-employment level (the so called NAIRU).

Now I want to know, why is it so? I fear it's my bad maths; R can do weird and wonderful things if you are not careful. But I also wonder: Is this a random artifact in the data or is it significant? What does this mean for the cacophony of rent-seekers from the non-mining states lobbying the RBA to lower interest rates? Should this data sound a cautionary note for the doves on the RBA board? Will the rent-seekers sow the seeds of their own destruction?

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