As shown by the two articles below Australia is taking this news far more seriously than the rest of the world. The Guardian reports that CPI inflation has fallen to 1.3% per year, while the Australian uses the word deflation - i.e. just the change over the last three months.
Deflation is "the persistent fall in the average price level leading to a rise in the purchasing power of money" (Russell and Heathfield, Inflation and UK Monetary Policy 3/E). Clearly Australia has some way to go before it achieves deflation then. However the fear that the economy isn't doing as well as everybody thought and might be headed for recession is capturing the popular imagination.
As the data below shows there were particular classes of goods where prices fell, while other classes exhibited increases. On balance the general price level fell.
It will have to be the subject of another post to discuss the effects of deflation. The important point to note for now i that this weak inflation figure, well below the RBA target, and possibly indicating that inflation will fall further, means the RBA really should cut interest rates further. Given the time lags involved in the effect of monetary policy that means next Tuesday should see a rate cut.
The above shows how groups of goods in the CPI changed over the last three months
The Australian annual inflation rate over the last four years and the quarterly change is shown at the bottom. A falling general price level is highly unusual and may indicate a great deal of spare capacity in the economy.
This article is essential to VCE students who will need to be able to explain influences on both inflation and monetary policy.
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