ANALYSIS

DON'T let the worry warts convince you that lower inflation is anything but good news.

It doesn't signal that the Reserve Bank has crushed the economy with ultra-high interest rates and we're on the brink of a downturn. It does mean the Reserve now has the room to ease up on rates, as it sees fit, to help non-mining sectors of the economy which have been doing it tough from a higher Australian dollar.

The Australian economy is still showing signs of being at near capacity. 

More remarkably, it means Australia is managing to do something we've never done before: have a mining boom that doesn't end in an inflationary puff. Mining booms boost national incomes and put strain on the economy's relatively fixed supply of resources, including workers and capital. More money chasing the same supply of goods is a recipe for inflation.

Indeed, the Australian economy is still showing signs of being at near capacity with the jobless rate remaining at a near historic low of 5.2 per cent.

But annual inflation, we have learnt, is running at 1.6 per cent.

How have we managed it?

A number of temporary factors are in play, including a fall in banana prices after last year's interruptions to supply.

But the big story in yesterday's numbers is how the higher dollar is helping to contain the inflationary pressures of the boom. While overall prices were up just 1.6 per cent on the March quarter of last year, this masks a 1.5 per cent fall in the price of tradeable goods and services and a rise in the price of domestically produced goods and services of 3.6 per cent.

A higher dollar and the rise of low-cost production centres such as China means the prices paid for clothing, homewares, electronic equipment and holidays abroad have fallen.

But the high dollar might not last forever, and if it doesn't, we'll be paying higher prices as quick as you can say ''Bali''. Indeed, if interest rates are cut next week, the impact will be turbocharged, because investors will sell Australian dollar-denominated assets, causing the Aussie dollar to fall and remove some of this inflation-busting effect.

The Reserve may also be cautious of cutting too much because of the impact on confidence. That the Reserve hasn't had to slash rates this year has helped reassure Aussies that, despite turmoil abroad, things are not too bad.

Indeed, if the Reserve does cut interest rates next week, as most economists now expect it to do, it should be seen simply as a resumption of a gentle cutting cycle which began in November last year, followed by another cut in December.

A super-sized half a percentage point cut should not be seen as an aggressive rate-cutting exercise, particularly given rising prices for labour-intense, domestic services such as education and health. Nor should it be seen as a reflection on the government's budget, which despite the hype, should have little impact on the macro economy.

Rather, a super-sized cut would reflect a suspicion by the board that not all of the rate cut will be passed on by banks.

Low unemployment. A budget in balance. Inflation under control.

If that doesn't sound like good news to you, you'll never be satisfied.

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