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Impacts of Asian inflation -

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ELEANOR HALL: This week's inflation figures confirmed that the cost of living is rising for
Australians.

But buried in the detail was an indicator that things may be about to get a lot worse.

That was the news that prices are rising in categories where they're traditionally stable or even
falling - those categories like clothing and furniture, where many products are imported from
China.

So is Australia about to be hit by imported inflation from Asia?

I put that to economist Richard Martin, from IMA Asia, who said that the world economy has
benefited from cheap Chinese imports for the last decade and that that era is ending.

RICHARD MARTIN: China had a fairly strong upward push on the cost of manufactured goods going on
for well over a year now and what they're doing is passing through the much higher prices they're
paying for commodities, for coal, for oil, for copper and all of that, and it has been a big
discussions between the manufacturers in China and the buyers from China.

ELEANOR HALL: So will we see a trend now to increasing rather than decreasing prices for goods
imported from China?

RICHARD MARTIN: Where you'll really see it in Australia is when our currency starts to move in
opposite directions. We have been shielded from it a bit over the last 18 months when the China
price has been going up because the $A has been going up and that means that consumers here in
Australia really haven't seen the impact of it.

By contrast, in America, they really have seen the impact and there the prices have gone up
significantly and people are noticing it.

When the $A no longer rises with China's currency, you will start to see the prices move up quite
quickly.

Now we don't think that is about to happen this year but it could be a big factor in 2009.

ELEANOR HALL: But does that essentially mean that Australia will be importing inflation from Asia?

RICHARD MARTIN: Everyone is importing inflation from everywhere right now. You're importing
inflation the moment you buy fuel from the refineries in Singapore or you buy pick up trucks from
Thailand.

There is inflation pretty much everywhere in the world. It is hard to pin it down to one country
though you might well say if you walked around the average supermarket or department store in
Australia, a significant portion of those goods, of their textiles, clothing, footwear,
electronics, so they're coming back to the buyers who come from Australia and the States and Europe
and saying guys, we've kept the price as low as we could for the last three or four years but it
has to move up now.

Will that have an impact on inflation here? As you said, we'll see a bit of it coming through on
the CPI but I wouldn't want to overplay it. It's not going to be such a big factor this year.

ELEANOR HALL: How much of a problem is inflation in Asia?

RICHARD MARTIN: In Asia, if we move outside of China, it is a problem. Right across Asia central
banks have kept their interest rates as low as possible but by doing that, and they've done it too
long in Asia, the central banks have done it too long.

They are now running negative real interest rates. That is, the inflation rate has gone up above
the policy rate for the central bank and that's a stimulant to inflation in the economy which they
don't need.

So right across Asia in the third quarter, we're expecting central banks to be edging up their
interest rates and the big question is, will that, will we see Asia just run into a brick wall in
the third quarter if that goes on.

ELEANOR HALL: How much has the Australian economy benefited from the downward pressure on inflation
from Asian imports and how much of a shock would it be if that goes?

RICHARD MARTIN: Well, you're right to say we've benefited from it and that has been a story
worldwide. That economists, central bankers and even Government people have talked about.

In the last decade, in the West, we have had pretty low inflation. A large part of that is due to
some very astute management by the central banks and the absence of second round inflation in wage
breakouts.

But one of the factors in there has undoubtably been this just flow of goods out of Asia with flat
prices year after year after year, more features and in some cases, decreasing prices and that has
been a great benefit to the global economy.

Asia will be moving its production price up now. China will lead. The others will follow and it
means that the benefits that we got from that wonderful dynamic over the last decade, fades a
little bit.

Central bankers will watch this very keenly because they don't want to see this lead to another
upward push in inflation and it might mean that they keep their interest rates a bit higher going
through the next year as this process unfolds.

The thing that everyone watches for now apart from this price push from China is will we get a
second round outbreak of inflation where it feeds through into wage demand.

And again here, you know, Australia is pretty sophisticated on this. We have been working with
keeping wage increases in line with the capacity of the economy now for about a decade.

I don't think you'll see the union movement nor a Federal Labor Government break that down so we
should go through ok.

You wouldn't want to overplay it. As I said a few moments ago though, the key on this imported
inflation is when the $A stops rising. You know, we might go through parity with the US dollar but
when we fall back, that's when we will really notice the higher cost from China.

ELEANOR HALL: And that's Richard Martin, the managing director of IMA Asia.