Economists warn of need to stop deflation as prices fall

 

Top economists have warned of the urgent need to prevent crippling deflation after the biggest plunge in prices since the Great Depression.

The Australian Bureau of Statistics on Wednesday said its consumer price index fell 1.9 per cent in the three months to the end of June - the biggest drop since 1931 - driven down by free childcare and petrol charges in free fall.

Prime Minister Scott Morrison in Parliament House, Canberra on Wednesday. Picture: NCA NewsWire/Gary Ramage
Prime Minister Scott Morrison in Parliament House, Canberra on Wednesday. Picture: NCA NewsWire/Gary Ramage

Remove these factors and the CPI would have risen 0.1 per cent.

Deflation is a major danger to economic growth. When overall prices go backwards it has the effect of increasing the relative value of mortgage debts and other borrowings, reducing spending power.

Faltering demand would also cause companies to cut their output, with devastating consequences for jobs, wages and economic growth.

While free childcare has ended and fuel costs are rising, Westpac senior economist Justin Smirk said it now appeared there was an "underlying deflationary trend".

Over the financial year, prices went backwards by 0.3 per cent.

CommSec chief economist Craig James said consumers should be given "every encouragement" to keep spending.

"If consumers start holding off on purchases on the hope of cheaper prices, then we will have a problem," Mr James said.

ABS chief economist Bruce Hockman said "since 1949, this was only the third time annual inflation has been negative."

The previous times were in 1962 and 1997-98.

 

 

The so-called trimmed mean annual rate of inflation - which is closely watched by the Reserve Bank of Australia - fell to 1.2 per cent, the lowest on record.

The RBA aims to keep that measure at between two and three per cent. But it hasn't been in that band since 2015.

St George senior economist Janu Chan said the trimmed mean decline suggested "price weakness is more broadbased".

Data from UBS shows Australia is far from alone in experiencing a collapse in inflation. It has also happened in the US and in Europe, from higher levels.

UBS chief economist George Tharenou said it was unlikely the CPI result would lead the RBA to lower interest rates any further.

However Mr Tharenou said he was expecting the federal government to do more to spur on the economy.

Prime Minister Scott Morrison said "these most recent numbers are, I think, quite unique to the rather extraordinary circumstances we find ourselves in."

"Clearly, the impact of the pandemic which has produced the COVID recession is having a negative impact on the economy and I think everybody understands that," Mr Morrison said.

"So what do you do about it? What you do about it is get Australians back into jobs.

"You provide JobKeeper, you provide JobSeeker, you provide cash flow support, you give the instant asset write off, you do HomeBuilder, which is proving to be a great, a tremendous success, you provide support to the entertainment industry, you go and get films to come and base in Australia, you put $1 billion into skills training and create 340,000 places and support 180,000 apprentices. "

He said there would be more stimulus in the budget.

Labor's Treasury spokesman Jim Chalmers said "even before the virus inflation had been low, and this shows the desperate need for a comprehensive plan to kickstart the recovery and create jobs."

The 95 per cent fall in the price of childcare was due to the federal government making it free in early April.

Preschool was also made free in some states, including NSW, leading to the 22.6 per cent drop in the CPI category that combines it and primary school costs in Sydney.

Fuel was down 20 per cent after demand plunged, with consumers around the world in lockdown. The price of petrol has bounced back about 10 per cent this month.

Nomura senior economist Andrew Ticehurst said it would be a "long slog" to get the economy back toward normal and that the RBA's official cash rate would not go above its current level of 0.25 per cent for "several years".

CommSec's Mr James asked "does it feel like the biggest quarterly fall in prices in 89 years? If you were outfitting your home office with furniture and computers, probably not.

If you are renting, with children in childcare, and paid electricity bills and health insurance premiums in the past quarter, then you probably noticed a big drop in outlays."

Originally published as Economists warn of need to stop deflation as prices fall


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