The dragon
of inflation has snorted twice, first when the Producer Price Index (PPI) showed
a 4.5 % rise in the year to June, and now with today’s consumer price index
(CPI) showing a rise in the year to June of 4.0%.

“Special
factors” are said to be the rise in the price of oil (and therefore petrol) and
the rise in the price of bananas following our own version of Hurricane
Katrina. No doubt the Reserve Bank will look closely at its “trimmed Mean”
measure and conclude things aren’t as dire as the raw data
suggests.

Henry is
old enough to recall the rise of
inflation in the early 1970s.
Then the “special factors” were the rise in the prices of potatoes and onions,
although in reality the inflation was almost wholly imported at first, then
greatly exacerbated by foolish fiscal policy and weak monetary
policy.

This time
the “international” factor is the mother of all resource booms. As the SMH reports, “After breaking the
Australian record for the biggest profit last year, BHP Billiton is poised to
smash the $10 billion barrier for the first time when it reports its annual
earnings next month.”

This is a
big story. As part of this story, BHP’s costs are also escalating, and this is
a fact of life for global mining companies. Henry’s sources say that, for
smaller miners, simply getting relevant expertise is a major
problem.

Cost
escalation is a more general theme, and the inflation dragon has snorted twice,
and the risk is clearly that it again stirs from its
lair.

The strong
CPI is likely to be the final nail in the coffin of cheap money. The Reserve
Bank’s board meets next Tuesday. Watch this space for Henry’s definitive
analysis.

More
reading at Henry Thornton.