Deflation in Australia: Inflation Down First Time in Seven Years


It is big news. Australia has slipped into deflation or negative inflation for the first time in seven years after prices of petrol, food and clothing came down in the March quarter along with the cost of a slew of goods and services.

Giving details, the Australian Bureau of Statistics (ABS) said the consumer price index (CPI) shrank 0.2 per cent in three months that ended in March 2016 and the annual rate of inflation dipped to 1.3 percent from the 1.7 percent till the end of December.

This subdued inflation rate, which is part of the global trend, may force the hand of the central bank for a rate cut. The RBA has an upcoming meeting in May.

Persistent deflation would require the remedy of cash rate being cut from the lowly 2 percent to boost spending. It may also drive down the dollar further, reports Stuff.Co.Nz.

The fall out of deflation will be that falling prices can discourage spending and investment. Says Paul Dales of Capital Economics’ Australia:  “Whereas the RBA was previously thinking that low inflation would allow it to cut interest rates if demand faltered, it is now clear that low inflation itself is the problem.”

Analyst Jamieson Coote said the RBA had been “caught sleeping at the wheel.” He called it a “shocking set of inflation numbers” in a period when the falling currency should have boosted the tradeable.

According to experts, the deflation scenario can dampen future price expectations and more cuts in interest rates can follow. Consumer data is showing that consumer prices are hit down by tumbling oil prices.

“It looks like the disinflationary trend intensified in the first quarter,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

Though RBA has repeatedly said that low inflation would yield room for further interest rate cut, it also added that the rate cut is not the right prescription for boosting the economy, reports Reuters.

There is an element of surprise at the deflation news as Australia had clocked a relatively rapid growth of 3 percent in 2015 and business conditions and investment had been improving. Unemployment was also down to 5.7 percent in March from the 6.2 percent of the same period in 2015.

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