Retail Spending & Inflation

Submitted by Jim Thesiger on 18 June, 2008 - 15:37

Here is the discussion by Macquarie Research Equities (MRE) about why retail spending seems to be the key factor is controlling inflation.

Retail Spending & Interest Rate Bending

It appears that weaker retail spending is playing a central role in the Reserve Bank of Australia’s (RBA) inflationary stance and deliberation of monetary policy. Macquarie Research Equities (MRE) discusses why retail spending seems to be the key factor is controlling inflation. Is it because other areas of the economy remain quite resilient to the credit crisis? If so where could the opportunities prevail?...

Monetary Policy Analysis

RBA expects non-farm GDP growth to fall to 1.75% over 2008 and 2.5% over 2009. MRE emphasis the degree of pessimism that these forecasts carry despite the likely improvement in Australia’s terms of trade given weaker growth.

Why does the RBA want to reduce growth to 1.75%?

MRE infers that a former RBA Research Discussion Paper is perhaps the reason. The constructed inflation model within the paper states that “If GDP growth is 1% below trend this will cut inflation by 0.5ppt in the first year and by 0.3ppt in the subsequent year”. Hence, the slowdown envisaged by the RBA is the minimum necessary to bring inflation back towards the top end of the inflation target by 2010.

How can this reduction in growth be achieved?

Given the level of government infrastructure spending and boom in global commodities it will prove quite difficult to ease economic activity within the Australian economy. The RBA would clearly recognise these developments and be left within namely the retail sector as the likely deflating catalyst.

If this is the stance of the RBA, perhaps a protected lending strategy would provide some comfort for investors still looking for Australian resource-based equity exposure. If a leveraged and protected strategy appeals to your financial needs have a look at the MQ Listed Protected Loan – the next generation in protected lending:

MQ LPL Website: www.macquarie.com.au/lpl