Australia’s inflation rate snuck up to an annualised 1.6% in the June quarter, recording relatively healthy growth of 0.7% in the June quarter. Regardless of what appears to be an improving inflation rate, the annual result is still lower than the RBA’s target range of 2% to 3% per annum.
The data shows that Australia’s inflation rate has been underperforming the target for all the second half of the decade displayed in the chart below. To be fair, this is a phenomenon of modern developed economies, as much as it is an Australian experience. Moreover, there is considerable interest in the extent to which this experience is linked to what appears to be a period of equally low unemployment.
To go straight to the dashboard and take a closer look at the data, click here.
Commenting in The Age in early August, distinguished economic commentator Ross Gittins outlined a recent speech of the RBA Governor, Phillip Lowe. In that speech, Lowe essentially answered this ‘exam question’:
“…why is inflation so low at the same time as unemployment is also low – and what’s the government doing about it?”
Lowe argues there are three factors that explain how these very different circumstances have come about.
First, inflation targeting by central bankers is an effective tool for signalling to markets what they might reasonably expect prices (and wages and general costs within the economy) to grow by over the coming two to three years. The evidence of the effectiveness of this in Australia is that over the nearly thirty years Australia has operated its target, the average inflation rate has been 2.4% per annum.
Second, Lowe suggests that spare capacity in most advanced markets means that resources (including labour resources) are not under significant stress, thus reducing the pressures for price increases. Technological deployment has clearly played a role in that more efficient (from an economic standpoint) allocation of resources.
As Gittins puts it neatly:
“Our labour market seems to be more flexible – and less inflation-prone – than it used to be.”
Third, Lowe points to structural economic changes (including technology and globalisation) as operating to keep prices low. Global access for manufacturing behemoths like China helped suppress prices, while at the same time placing huge quantities of goods onto global markets. That transactions can be completed in real time, across the planet, by individual customers dealing with everything from small to massive businesses is now well accepted. That new model works because technology allows the smallest consumer access to significantly more information – enough now for retail trade to have gone in less than a century from the ‘eyesight local’ to the ‘infinite global’.
The result – one of them anyway – again as Gittins puts it, is:
“The prices of manufactured goods in the advanced economies have barely increased over the past couple of decades.”
Why would prices have increased when every consumer can find the global best price for their goods, in their preferred currency, just by asking their favourite search engine?
These are all real factors that combined play a major role in understanding that low inflation is likely to be a defining characteristic of advanced economies for a long while yet.
