Bloodletting is an ancient therapy, dating back at least three millennia, and traditionally used to "cure" a range of ills.
asserted
Bloodletting → date → ills
Whether through leeches or lancets, blood was drawn from the patient to rebalance their humours with the hope of a cure.
asserted
blood → draw → cure
But the outcomes were no laughing matter for many unfortunates.
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outcomes → laugh → unfortunates
Perhaps most famously, the USA's first president George Washington had more than one-and-a-half litres of blood removed in an attempted cure for epiglottis that likely caused, or at least hastened, his death in 1799.
asserted
that → have → 1799
Fortunately for us, the practice fell out of favour as medical science progressed in the 19th century, and is now restricted to a few specific diseases where it has been shown to help.
Unfortunately, the economic equivalent of bloodletting remains the treatment in vogue whenever inflation is the symptom, whatever the underlying cause of the disease.
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cause → fall → disease
Draw money out of the economy by jacking up the cost of debt and the patient will recover … if the treatment doesn't kill them.
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treatment → draw → them
Rate rises don't fix supply problems
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rises → fix → problems
Last week, the Reserve Bank's deputy governor Andrew Hauser told 7.30 that Australia's economy has "one big problem and that's inflation".
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that → tell → problem
Echoing words from his boss at her last press conference, Hauser told Sarah Ferguson that:
"Inflation has been above target for a long period of time and, at some point, we will have to say that is long enough.
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that → echo → point
"
And, if we get to that point, what's the solution?
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solution → get → point
"We will raise interest rates further than otherwise we would need to do so," the central banker responded.
"
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banker → raise → rates
So what exactly are these "upside risks" that could mean inflation is higher and more stubborn than the RBA's existing forecasts?
uncertain
inflation → mean → forecasts
Hauser listed three.
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Hauser → list → three
"One is the Middle East and the ongoing crisis there, one is a really unexpected global boom driven by AI, and one is the weakness of the supply potential of the Australian economy," he said.
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he → drive → economy
Will higher Australian interest rates influence any of those things?
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rates → influence → things
The US and Iran will not stop attacking each other because Australian mortgages have become more expensive.
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mortgages → stop → other
The money behind the AI boom is mainly coming from US multinationals, so higher local rates are likely to make little difference to investment in that sector.
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rates → come → sector
And higher rates are more likely to weigh on the supply capacity of the Australian economy rather than grow it, as they send some businesses broke (handing their surviving rivals more pricing power) and discourage firms from borrowing to increase capacity and productivity.
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they → weigh → capacity
As CBA's chief economist Luke Yeaman explained on The Business last week:
"The economy is slowing, but not fast enough for their liking, and an extra rate hike now could help drive that growth down lower and bring it more in line with the supply capacity of the economy."
uncertain
hike → explain → economy
Rising rates mainly lower inflation through destroying demand, hopefully more quickly than they reduce supply.
asserted
they → rise → supply
Are Australian home owners paying for the AI boom?
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owners → pay → boom
A lot of column inches have already been devoted to the role that the Middle East conflict and Australia's productivity crisis have played in our lingering inflation problem.
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conflict → devote → problem
However, it is telling that the RBA has elevated the AI boom alongside those issues.
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RBA → elevate → issues
Hours before Andrew Hauser appeared on 7.30, the Reserve Bank's chief economist Sarah Hunter spoke at an AFR property summit.
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economist → appear → summit
She said the bank was hearing anecdotes about workers being sucked in, at inflated wages, to build new data centres, adding to cost pressure across the construction sector.
"They want these centres built really rapidly, as fast as possible in some cases, and it's definitely adding to demand," she said.
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she → say → demand
"You can see business investment has picked up really strongly over the last sort of nine months or so, nine to 12 months, double-digit growth, and a decent chunk of that is data centres."
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chunk → see → that
Research from the Committee for Economic Development of Australia (CEDA), released last week, shows business investment spending is at 12.6 per cent of GDP, its highest level in more than a decade, since the mining boom wound down.
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boom → release → decade
CEDA economist Julie Toth said the boom was being almost entirely driven by the information, media and telecoms sector as businesses ramped up their investments in data centres, cloud computing and artificial intelligence infrastructure.
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businesses → say → centres
Investment in this sector almost doubled over the past year.
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Investment → double → year
Just as the investment in that sector, concentrated in WA and Queensland, contributed to interest rates rising around the country, resulting in a two-speed economy earlier this century, the AI boom will inflict pain across other sectors.
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boom → concentrate → sectors
With most economists seeing the economy running above capacity, as evidenced by inflation, all the demand being added by data centre construction has to be offset by the RBA raising rates to smash activity in other areas.
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RBA → see → areas
As with the mining boom, much of the benefit from the AI boom will likely be captured by overseas shareholders of the multinational companies driving it, while the costs will be borne domestically through higher interest rates and slower growth in other sectors.
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costs → capture → sectors
That brings us back to interest rates, and the RBA's tricky decision about whether to hike in two weeks or not.
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That → bring → weeks
Markets are pricing in at least a 75 per cent chance that the cash rate will go up to a 15-year high of 4.6 per cent on September 29.
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rate → price → September
They are pricing in a virtual certainty of two rate hikes by February, with a 50/50 chance of a third by mid-next year.
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They → price → year
A cash rate of 4.85 per cent would be the highest since rates were slashed over late 2008 in response to the global financial crisis.
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rates → slash → crisis
Andrew Hauser said getting on top of inflation was not only the bank's primary mission, but the community's expectation.
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getting → say → inflation
"People are furious about inflation," he said on 7.30.
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he → say → 7.30
"It's the most profound message that we get.
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we → get → that
Everywhere I go, I hear cost, cost, cost, inflation, inflation, inflation.
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I → go → inflation
…and 11 more, not listed.