Wage inflation sharpens RBA dilemma

Further rate hikes will push the Australian dollar higher and further squeeze the manufacturing and tourism sectors and make life more difficult for small businesses generally.

Then there is asset price inflation to worry about. Global share prices have resumed rising after a brief correction to the great Greenspan-Bernanke bubble.  The Reserve Bank can do nothing but give advice to Ben Bernanke on this matter. House prices in Australia have apparently stopped rising but there is a general housing shortage which will be made worse as strong population growth is faced for a time by subdued construction. 

The government is spruiking a tough budget, which will allow for a flood levy and big new carbon tax.

The Reserve will be tempted to leave interest rates unchanged until the budget is delivered and assessed.

That would be a mistake, but an understandable one.

If the Gillard government cannot persuade the major unions to go easy on wage claims, it will quickly be seen as an important mistake.