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Reserve's quest for happiness

By Henry Thornton - posted Tuesday, 6 March 2007

Australia’s underlying inflation has been creeping up since early 2001.

The big falls in the rate of unemployment have enabled the overall misery index to creep down, notwithstanding rising inflation. This was the theme of last month's contribution to the work of the board of the Reserve Bank, which meets again today.

December quarter inflation surprised in being lower than expected. This outcome came as a relief to many people: equity traders, bond holders, people with mortgages who had feared further hikes in interest rates, Reserve officials and members of the federal Government.


For all these groups, the misery index turned down.

The consumer price index release contained such a beautiful set of numbers one was tempted to imagine intervention from on high, clearly impossible in a non-banana, non-republic.

This month we apply the logic of the misery index directly to the Reserve itself.

Our raw material is the Reserve's quarterly statement of monetary policy, available on its website since February 1997.

This document is always a good read. It provides a thorough economic overview - a veritable checklist. It includes extensive comments on inflation, inflationary expectations and the state of the labour market, and in particular the rate of unemployment.

The inflationary expectations are taken from surveys of consumers, bond markets and, increasingly over recent years, Reserve staff.


We initially constructed a Reserve Bank "misery index" consisting of the rate of unemployment and the bank's inflation expectations.

We quickly realised that the circumstances prevailing since 1997 made a Reserve Bank "happiness index" more appropriate.

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First published in The Australian and on Henry Thornton's website on March 6, 2007.

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About the Author

Henry Thornton (1760-1815) was a banker, M.P., Philanthropist, and a leading figure in the influential group of Evangelicals that was known as the Clapham set. His column is provided by the writers at

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