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Wow. You don’t often see a headline inflation number that reads 0.0 for the quarter. Zero. Nada. Nought. Zilch. Or an annual inflation rate of just 1.3 per cent.
The underlying, or core, rate of inflation (when you strip out volatile items) is the lowest it has ever been.
We’ve killed inflation and that’s not good.
Some people who lived through the rampant inflation of the 1970s and 1980s — when consumer price rises peaked at more than 10 times the current rate — might question why.
Back then, people lost their homes and the economy went from boom to bust as interest rates rose to crunch roaring inflation and leaping wages.Rate cut crescendo mounting
The calls for rate cuts are getting louder, but will they work and are they even necessary?
But a vicious circle of low inflation and low wages growth presents its own problems — and they are just as bad in their own way.
When inflation rates were soaring, and wages rose to match the price rises, people who survived the high interest rates soon found their debts were inflated away.
Buy a home, and rising wages meant it wasn’t too long before the borrowings looked small compared to your growing pay packet.
Not now. RBA governor Phil Lowe has expressed concern that people who borrowed on the expectation of rising wages will be saddled with uncomfortably high debts for the long haul.
Low inflation often means rising inequality
Inequality is also fuelled by the low-inflation, low-wage environment.
Financial institutions and those rich enough to do so can borrow money for next to nothing and invest in long-term assets such as real estate and shares.
But the workaday Jill or Joe who can’t afford to cash in on the opportunity has been stuck with stagnant wages growth.Wages crisis threatens stability
Some of Australia’s leading labour market analysts warn wages stagnation is undermining financial stability and social cohesion and there is no improvement in sight.
Although house prices have peaked and fallen over recent times in Australia’s major capitals, in general terms, the era of low consumer price inflation has gone hand-in-hand with high asset-price inflation.
The upside is that, with inflation so low, even the meagre wages growth of recent times is — on average — outpacing prices. But it is a small upside.
Retirement incomes are being cruelled by the modest wages growth that exists in tandem with low inflation.
If your pay grows at a healthy clip, so do the compulsory superannuation contributions the employer is required to make on your behalf. But low wages mean lower savings for retirement.
You don’t get much of a return on money in the bank or government bonds when inflation and interest rates are so low.
So people face an invidious choice of leaving their money where it barely keeps up with the cost of living or shifting into investments with risks they don’t have the expertise to navigate.
Remember too that the extreme low inflation we’re experiencing is the average of a “basket of goods and services” and some of those goods and services are actually going down in price.
The danger is that people will put off purchasing in the expectation of further price falls, and that will undermine consumption, which is the mainstay of economic activity and has already been struggling.
The RBA’s official target rate for consumer price inflation is between 2 and 3 per cent.
It has been below that for three years. And counting.