for many years prior to the crisis of the late 1990s. the economy of continental europe 1 / 8 remains a major disappointment both for its own citizens and policy - makers, and for those elsewhere looking for the global recovery to be a bit more balanced. beset by the effects of ageing, high levels of government debt and great difficulties in achieving structural reform, the old continental european economies are struggling to keep up with the newer, more dynamic countries joining the european project from the east. at the same time, global rates of inflation remain low. across about 50 significant countries around the world, the median inflation rate is about 2½ per cent. the scourge of the 1970s and early 1980s has been well and truly contained in most countries ; there are relatively few really high inflation countries now. at the same time, the incidence of deflation ( never that wide ) has diminished in the past couple of years. graph 2 there is, of course, the likelihood that the big rise in oil prices will push inflation up over the coming year, and some commentators are beginning to worry that this could be the start of an undesirable trend. much will depend on how economies and policy - makers respond to the rise in oil prices, a subject to which i shall return shortly. for the moment, what is remarkable is that the rise in raw material prices over several years has not already pushed inflation rates up more than it has. it is partly as a result of this general climate of price stability that nominal long - term market interest rates are at 50 - year lows. but even in real terms, long rates are unusually low. apparently, financial markets have a very benign view of the risks associated with the medium - term outlook. 2 / 8 graph 3 given the prominence of discussion about'global imbalances'– by which people mean the dependence of the global expansion on the strength of the us and china, and the rising current account deficit of the us – it is all the more remarkable that financial markets seem so sanguine. but as stated by the governor1 a couple of weeks ago, a more careful analysis of the'imbalances'shows that high rates of saving and low rates of investment in asia have produced a very low cost of capital for the developed world, to which the us economy has responded, with the us current account deficit a natural result. while everyone agrees this cannot continue forever, forever is a long time and it may well continue for a while yet

, australian households borrowed at a rapid pace for the purposes of owning dwellings, either to occupy or to let out. the median price of dwellings in australia rose in parallel, by 120 to 150 per cent, depending on the price measure used. 3 the peak in prices nationally was about two years ago now, in the last quarter of 2003. since then, median prices have risen further in some regions, but have fallen a little in sydney and melbourne, to give a flat performance for the national median price. this has been associated with a slowing in the pace of borrowing, particularly on the part of investors, though the rate of growth of outstanding credit remains, if anything, somewhat higher than one would expect to be a sustainable pace in the long run. this has been associated with a waning of an apparent wealth effect which had been in operation, where consumer spending rose faster than income for a number of years and household saving rates declined. 4 some estimates suggest that, in net terms, households actually withdrew some of the accumulated equity in the dwelling stock during the early years of this decade, a small proportion of which was probably used for consumption purposes. ( the rest appears to have been placed into financial assets. ) but since mid 2004, consumption spending has been proceeding in a more moderate fashion. at 3 per cent growth over the past year, it has been rising more in line with income. that is not a particularly weak outcome in any absolute sense, but it is a quite notable slowing from the earlier 6 per cent pace. it is quite fortuitous, of course, that this adjustment has coincided with the large income gains from the terms of trade. a scenario where the housing boom had gone on for two or three more years and then turned down at the same time as the terms of trade began a cyclical fall would have been much less attractive. petrol prices i noted earlier that worldwide, rising energy prices over several years did not seem to have pushed up inflation much, so far, partly because there seemed to have been moderation in other prices. this same point can be nicely illustrated by australia's consumer price index. the chart below shows the change in the cpi, at the sub - group level, 5 over the past two years. the figures are up to june 2005 ; new data for the september quarter will be published the week after next. in tasmania, house prices rose by less over the same period though they have continued to rise of late. tasmania still enjoys relatively lower costs of