Reserve may face a surge in wages

But now, although the economy is slowing, there is a lot of pent up demand for wage rises - particularly in the protected public sector - that could spread the resource sector pay pressure to other parts of the economy. Where the resources boom is hottest, Western Australian public servants are due to rally this week for a 23 per cent pay rise over three years. Victorian teachers want 30 per cent over three years. University general staff are after 9 per cent for one year.

There has been the huge spectacle of the power privatisation showdown in New South Wales, a clear test of the strength of organised labour against political Labor in government.

How these demands are handled will do much to determine the degree to which the economy slows, and therefore the fate of the Rudd Government.

These issues will occupy the minds of Reserve Bank board members today.

Henry's general point about the desirability of suspending inflation targeting will doubtless be put aside for the usual reason: "Not invented 'ere, gov'nor." But there are enough reasons apart from this for the bank to stay its hand. The economy is slowing, confidence has taken a big hit and a moderately firm budget is in prospect.

There can be no guarantee that further rate rises are off the agenda. But further imported inflation is no good reason for continued rate increases.

If wage inflation remains contained, current interest rates and a firm budget may do the job of sufficiently slowing the economy to contain domestic inflation. A wages surge would mean all bets were off.

Over to you, Julia Gillard.