Inflation relevant

Australia's monetary policy uses a central bank to raise and lower interest rates in order to influence inflation.

When inflation is over 3 per cent, the Reserve Bank raises interest rates to stop the economy overheating and when inflation is too low they lower interest rates to stimulate the economy.

By keeping inflation within 2 and 3 per cent, they promote stability which promotes employment.

So, lately we've had interest rates at 4.75 and yet we've had two quarters in a row when inflation was well above 3 per cent: 3.6 and 3.9.

So it should be time for the Reserve Bank to raise interest rates again.

However my company, Yellow Brick Road, has been arguing for a lower official interest rate for several months, because we believe the connection between inflation and interest rates is broken.

Raising interest rates punishes those households and businesses that have nothing to do with the cause of the inflation. And economists say that most of Australia's inflationary pressure comes from the mining sector.

Have a look at the latest research from Commonwealth Bank economist, James McIntyre. His team took apart the Reserve Bank's economic forecasts for the next two years and calculated that over the next two years, the mining sector will grow an average 16 per cent while the non-mining sector will be lucky to see 1.5 per cent.

McIntyre says that over the next two years the non-mining sector "is likely to feel like a recession".

It's time for some questions to be answered: does the RBA want to shut down manufacturing, retail and tourism? Are we being told that the only industry worth being in is mining?

Bluescope and OneSteel - Australia's biggest steel makers - are turning their investment to iron ore mining. Bluescope has closed two blast furnaces and will sack 1000 steel workers. It's cheaper to send iron ore to China and buy their steel.

Qantas is going to sack at least 1000 staff as it tries to establish airlines in Asia.

Farmers are selling prime agricultural land to Chinese miners: it's easier to sell land for coal than it is to grow food.

The Reserve Bank is responsible for economic stability and controlling inflation is crucial for the high employment rates that stability promotes. But part of the stability mandate must include explaining the Plan to Australians.

And what is the plan? That people living in a 1.5 per cent growth economy have to pay the interest rates that control the inflation in the parallel 16 per cent growth economy?

Should we all become miners? Are we fools to be engaged in any other industry?

It's explanation time for the Reserve Bank.