Price inflation expectation will pressure RBA to raise interest rates

April 19th, 2007

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In a recent inflation survey conducted by the Melbourne Institute, more than 77% of respondent believe that prices will increase in the next 12 months (see Consumer prices expected to rise).

One of the things that central bankers fear is expected inflation?the rise in price that people are expecting in the future. The problem with expected inflation is that it can become a self-fulfilling prophecy. When it becomes so, a self-reinforcing vicious cycle takes place. That is why central bankers are always keen to maintain credibility as an inflation ?fighter.? However, as we said before, the idea that central bankers ?fight? inflation is absurd?they are the very source of inflation (see Cause of inflation: Shanghai bubble case study)!

For those who want interest rates to remain low, this inflation survey news is bad news. See our warning: More pain for Australia.