When it meets today the Reserve Bank would be wise to decide to sit on its hands for a bit. However, if wages begin to surge, all bets will be off and the bank will need to hit the economy with additional rate rises until people demanding wage increases get the message.
Henry has been accused of going soft and running up the white flag but is duty-bound to call it as he sees it.
Henry assumes that Reserve Bank Governor Glenn Stevens has woken up to the dangers of religiously enforcing his 2-3 per cent inflation target by driving the economy, or at least large parts of it, into recession. But now the unions, and perhaps Julia Gillard, need to get the message.
The global economy is in trouble. It is not just the US recession, if that is what it is; it is not just Euro-sluggishness, which is endemic; or the chronically weak Japanese economy. Rocketing food prices on top of very high commodity prices, including the painfully high price of oil, have the capacity to do enormous damage.
Poor people everywhere are becoming malnourished or even starving. Food riots in refugee camps are the tip of a large iceberg, yet the global boom has slowed only slightly.
It is common to talk of a two-speed economy in Australia. Now the global economy is divided into fast and slow streams and eventually those in the slow stream will object sufficiently strongly to matter.
Long-standing protectionist agricultural policies have been made far worse by massive, misguided subsidies for crops that can be used as bio-fuels. The net effect is a reduction of food-producing land at a time when wealthy people in booming third-world economies are demanding better-quality food.
Stevens and his colleagues at the Reserve Bank can do nothing to alleviate the global food crisis. His peers in other central banks can do very little to mitigate the dysfunctional global agricultural system, although Ben Bernanke and Jean-Claude Trichet might just be able to influence a political leader or two.
What central bankers acting in concert can do is to avoid turning a global slowdown into a recession that would multiply the misery of poor people everywhere. Stevens may just pass on this message to Ben and Jean-Claude.
More relevantly, he can see to it that Australia does not suffer recession caused by continually tightening monetary policy in pursuit of the outmoded nostrum of targeting goods and service price inflation at a time of vast global commodity inflation.
Henry's logic is simple, and we assume now widely understood: a lack of downward flexibility in most prices makes it impossible to offset sharp rises in some prices (oil, food, rents in Australia) by equally sharp falls in other goods and services of offsetting importance in the overall "target" inflation measure.
The Reserve Bank board will not spend too much time discussing the global economic circumstances, beyond the regular current economic conditions report. US-Euro-Japanese sluggishness will be noted. So too will the continued China-India-emerging nations boom.
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