Inflation: How low can it go?

Thu, 07 Nov 2019  |  

This article was written on 31 October 2019: It was on the Yahoo Finance website at this link: 


Inflation: How low can it go?

The Reserve Bank of Australia’s policy embarrassment continues with the September quarter consumer price index data showing the quarterly underlying inflation at 0.4 per cent, which translates to an annual rise of just 1.4 per cent.

In underlying terms, annual inflation has never been lower.

This locks in 4 straight years where underlying inflation has been below 2 per cent, the bottom of the RBA’s 2 to 3 per cent target.

It locks in 5 years where inflation has been at or below 2.5 per cent, the mid-point of that target.

It locks in just under a decade since inflation was above 3 per cent.

Missing the inflation target so badly for such an extended times says quite plainly that the RBA policy actions were wrong, particularly when other central banks around the world were able to meet their inflation targets with pro-active monetary policy settings.

Until the post-election interest rates cuts which have seen the official cash rate belatedly reduced to 0.75 per cent, the RBA held interest rates at a high level. So high, in fact, that annual economic growth slumped to a decade low under 1.5 per cent, this has seen the unemployment rate remain at or above 5 per cent and wages growth tracked plumbed near record lows.

Sure, the Morrison government’s quest for a budget surplus did not help as spending was cut and tax revenue sucked cash out of the economy, but for month after month, year after year, the RBA felt it better to keep a tight reign on monetary policy as it sought to deflate the growth in household debt and house prices. The RBA continues to drag out academically pure, but practically misguided, excuses about an unanticipated lift in the workforce participation rate as being a problem; or globalisation as a reason for low inflation.

To a point, this is fair enough.

But these are not new things that just popped up overnight. The RBA and other central banks saw these issues emerge years ago but it was the RBA which failed to fully appreciate the effect they would have on growth, wages and inflation. When the rest of the industrialised world was cutting interest rates to towards zero or less and some even embarked on quantitative easing, the RBA held rates steady, at a relatively high level.
It is noteworthy that since the RBA resumed the rate cutting cycle in June 2019, there are clear signs that the economy is poised for a stronger year of growth in 2020 and 2021.

Monetary policy works.

To its credit, the RBA had a rethink of policy a few days after the Federal election (is the RBA politically biased?) and it has cut interest rates three times in five months. There are signs this has worked. Look at house prices, retail spending, capex expectations, the low Aussie dollar and exports, to name a few areas to have benefited for policy stimulus. And the full effect of the interest rate cuts is yet to show up in most data, such are the lags in policy changes.

These lags will mean that the unemployment rate will probably not start to fall until the first half of 2020 which will only then see wage growth move higher and only then, is inflation likely to accelerate from the current record lows.

Inflation is the most lagging of lagging indicators.

Such is the problem with the RBA policy error in recent years – it takes considerable time to turn an economy around and an earlier policy move, when it was obvious the inflation target was being missed, would be yielding benefits now.

That said, the economy appears to be turning and while a further final 25 basis point rate cut might still be needed, the prospects for the inflation rate to reach the mid-point of the RBA target seems limited. Needed are quarterly inflation readings of 0.6 or 0.7 per cent which in turn requires annual GDP growth to exceed 3 per cent and the unemployment rate to track below 4.5 per cent. That scorecard of economic indicators are possible by late 2020, and would get a helping hand if the Morrison government were to use the mid-year budget update in December to ramp up government spending and/or give some tax relief.

Let’s hope they do it.


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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link:   


The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.