Emergency is over, but no rate rise for Christmas

Australia’s inflation is higher than the Reserve Bank's target range and will not subside to that level without further monetary tightening - removing "emergency" ease, actually.

This conclusion applies to underlying goods and service inflation but is greatly strengthened if one factors in asset inflation. House prices are rising too strongly for comfort, and until late last week equity prices were rising sharply also.

This is the case for another cautious 25-basis-point rate hike today.

What is the case against a pre-Christmas rate hike? In decreasing order of importance, there are three major arguments.

One, the US economy is still shedding jobs. US Fed chief Ben Bernanke has sought to reassure us all that recovery is in the pipeline, but (we are entitled to say) not so you'd notice.

The US economy has shed eight million jobs since the great crash of 2008. The rate of loss has slowed, to a mere 190,000 in October, but the rate of unemployment was estimated at 10.2 per cent.

Hours worked are well down, and unemployment, underemployment and fear of one of these conditions is keeping US consumers cautious.

Then there is the US budgetary crisis. The Great Crash and its alleviation have produced trillion-dollar deficits as far as the eye can see.

The worst may be over for emergency bailouts of financial institutions, but recession-busting spending and loss of tax revenue has destabilised the US budget.

Fixing this will require either a much stronger than expected economy, massive spending cuts, tax increases or all of the above.

The second and third measures are within the US government's power to do, but by their nature will depress overall demand in the economy. Fix the budget gradually is the theoretical answer (as the economy recovers), but this is far easier said than done.

The US dollar has fallen a good way, and Chinese Treasury note and bond holders are clearly nervous about the actual and projected value of their large US dollar assets.