AUSTRALIA’S economy has a Goldilocks zone, too much or too little inflation is bad for business. But the latest figures show Australia’s economy is faltering, as inflation has come in at its lowest rate in 50 years, according to Commsec senior economist Ryan Felsman.
He said wages were “providing a cap on inflation”, as continued underemployment and population growth kept pressure on the labour market.
The problem with inflation in the doldrums is that it shows the economy — despite unemployment at one of the lowest levels in years — is failing to pick up. Inflation acts as the grease in the cogs of the machine; too much or too little is bad. What Australia needs is the Goldilocks zone, of 2 to 3 per cent, which is where the Reserve Bank of Australia sets its inflation target band.
The higher the rate of inflation, the faster things lose their value, meaning those with a mortgage get the double benefit of paying off a mortgage that is worth less as their wages grow. The counterpoint to that is that in times of low inflation, wages don’t grow fast enough and inflation doesn’t run fast enough to let people get out ahead.
THE GOOD NEWS
Ryan Felsman said there were some upsides, with low price rises minimising the impact of petrol and power prices on the family bottom line.
There are plenty of reasons why the inflation rate is as low as it is. Going by the Australian Bureau of Statistics release from Wednesday, we can see there was a big fall in childcare costs (down 11.8 per cent), motor vehicles prices (down 1.8 per cent) and telecommunications equipment and services (down 1.5 per cent). The cost of food, clothing, rent (up 0.6 per cent), household products and services, communications and electronic goods has remained largely stable.
But according to AMP Capital senior economist Shane Oliver it all comes back to the most important thing: wages. Wages are what give companies room to raise prices and for Aussies to buy more, pay down debts and inflate away the value of their mortgages. Without inflation, the grease is missing from the machine.
“Inflation is feeding on itself and becoming self-perpetuating,” Mr Oliver told news.com.au.
“The longer we spend below the target, the greater the risk it becomes entrenched.”
NOTHING COMING TO PUSH UP INFLATION
Mr Oliver said Australians should expect an interest rate rise until at least late 2020, warning there was nothing on the horizon that might push inflation up.
“It seems we’re trucking along and fingers crossed something does come along,” he said.
This view was shared by Indeed senior economist Callam Pickering, who told news.com.au continued underemployment across the Australian economy was holding down wages.
“There’s a lot of spare capacity across the economy and that’s feeding through to inflation,” he said.
“Although the unemployment rate has dipped to 5 per cent, broader measures of labour market slack remain elevated and point towards a prolonged period of disappointing wage growth.”
But the longer the low inflation goes on, the longer it’ll be before the Reserve Bank puts up interest rates. Many experts say this removes a key weapon for fighting any future financial crisis that may come along.