Inflation or Noflation?

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The latest CPI data from the ABS has revealed noflation for first quarter of 2012. The previous December 2011 quarter also recorded noflation, contrary to RBA expectations of inflationary pressure from the minerals boom.

Quarterly CPI

It is likely that Tuesday’s meeting will be the point at which the RBA will have to abandon their expectations of rising interest rates to tame an Inflation bogie that has turned out to be Noflation in practice. In the April meet minutes, the RBA board finished with:

…If slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for a further easing of monetary policy. The Board would have the opportunity at its next meeting to review the inflation outlook based on comprehensive new data on prices, as well as information on demand and output. Members judged it prudent to evaluate those data before considering a further policy adjustment.

Can an annualised inflation rate of 1.6% make this case? Interestingly enough, it was less than one year ago when commercial news headlines were still talking about a rate rise – RBA’s Stevens hints at August interest rate rise:

The market has been paying more attention to a recent run of mixed domestic data which has shown jobs growth slowing, weakness in housing and credit and a sharp contraction in the economy in the first quarter as flooding hit coal exports.

Mr Stevens, however, made it very clear that he remains focused on the longer term impact of a huge trade and mining boom that should boost incomes and investment over time.

One could be almost certain that such a decision is off the cards now, especially given the recent decline in government bond yields for the month of April.

Government Bond Yields

There will also be no fiscal stimulus for the month of April, thanks to the recent austerity measures of the Australian Government. This leaves monetary policy to take up the slack for a slow down in Government deficit funded growth.

Date: Government Securities on Issue (AU$ millions)
Jan-2012 221646
Feb-2012 229706
Mar-2012 236036
Apr-2012 228426*

*As at 20 April 2012

It seems Wayne Swan is playing ball with the big rating agencies to protect the nation’s AAA rating.

Noflation clearly indicates that excessive consumer debt and a lack of liquidity in present market are causing downward pressure on prices. The standout noflationary phenomenon has been the decline in house prices of 4.8% per cent over the year to December 2011, which is straining many households as many homes fall into negative equity. Graph 3.6 from the RBA Financial Stability Review for March 2012 shows a noticeable increase in LVRs greater than or equal to 90%. According to Perth Now, Western Australia is the second highest state in Australia in terms of negative equity, where 8.5% of homes are currently worth less than was paid for them. Having said this, Graph 3.10 shows home loan arrears appear to have taken a sharp turn from the increasing trend in the 2011 Financial Stability Reviews.

It seems quite transparent that without a stimulus to liquidity via a rate cut next Tuesday, noflation could easily become deflation in months to come. Some mining boom…

About David Lawson

-Worked as a real estate agent in 2009, have since left the industry because I now see that it is all fuelled by euphoric expections and debt -Started to become concerned about the global debt bubble after reading 'The Credit Crunch' by Graham Turner about a year ago and have since followed Steve Keens debtwatch blog -Competed a Bachelor of economics in 2004 specalising in iternational trade and finance -Lived in the USA for 5 years of my life, have witnessed first hand there frivolous spending patterns and watched our country become the same over the course of last 10 years
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62 Responses to Inflation or Noflation?

  1. Dannyb2b says:

    “I would assert to you that plumbing the depths of homo sapiens (homo wisdom) instead of emphasizing the “reality” of homo economicus is the key to REAL progress”

    Economics is a key aspect of the wisdom required for real progress. So we should focus on it as much as anything else. Economics is how we organise ourselves, the more organised we are the more effective we are at performing any function and the more we learn about the nature of the environment we are in.

  2. cyrusp says:

    “Actually, so far as the actual continuation of technology and technological innovation is concerned Star Trek is more accurate than the image.”

    That’s generally how human brains work. See a trend, draw a straight line through it and extrapolate that trend indefinitely into the future.

    Like Professor Keen says, people generally find it hard to think systemically and see feedback loops. That’s why very few people anticipate bubbles bursting.

  3. NeilW says:

    “What happens when this environmental bubble bursts and economic growth is no longer possible?”

    That’s a classic case of confusing a stock with a flow.

    There is a a finite amount of stuff, but there are an infinite amounts of cycles we can put that stuff through.

    And that’s before we get to the matter/energy conversion process.

    So the idea that economic growth isn’t possible is claptrap. The cleanup and recycling industries are all in their infancy. Essentially we need more industrial fungi.

    Growth in its classic form has to slow down and be replaced with a form of growth that is more resource light, or preferably resource neutral – emulating the natural carbon and water cycles.

    So the road we take is a choice, not an inevitability.

  4. NeilW says:

    “Like Professor Keen says, people generally find it hard to think systemically and see feedback loops.”

    There’s a difference between being able to think systemically and see feedback loops and being a doom merchant.

  5. cyrusp says:

    “So the idea that economic growth isn’t possible is claptrap.”

    🙂

    “Anyone who believes exponential growth can go on forever in a finite world, is either a madman or an economist.” ~Kenneth Boulding

    http://physics.ucsd.edu/do-the-math/2011/07/can-economic-growth-last/

  6. NeilW says:

    “Anyone who believes exponential growth can go on forever in a finite world, is either a madman or an economist.”

    Correct. Which is why I didn’t use the word exponential.

  7. Frank says:

    “Anyone who believes exponential growth can go on forever in a finite world, is either a madman or an economist.”

    ..or expressed their belief befor about 1980. There was a time when it was completely within almost everyone’s expectations, that by the year 2000 we’d be well on the way to colonising the moon, other planets, and have mastered intergalactic space travel with exotic warp drives.

    This was a time when people invented and built road networks, telephone networks, radio networks, satellite networks, healthcare infrastructure, atomic power, space ships and moon walks.

    Unfortunately, after Thatcher and Reagans little escapade with the US printing press, all that stagnated. Now our technology expectations have been reduced to drooling over the next iPad version, and higher bitrates to download more porn.

    It’s in this culture of spoilt, obese, unambitious infatility, that we have to suffer the attitude mentioned earlier. Economic growth is limitless. With the right attitude and leadership, we should be able to achieve anything and go anywhere.

  8. Dannyb2b says:

    “Anyone who believes exponential growth can go on forever in a finite world, is either a madman or an economist.” ~Kenneth Boulding

    Its relative. Like Neil said growth can go on as long as what we take from the environment doesnt exceed what we put back. Growth can be exponential if our technological progress and efficiency is exponential also. Sustainability is key. So far the nature of technology has been exponential growth Im pretty sure so we just have to apply technological developments to areas like environmental management , energy etc…

  9. Frank says:

    “we just have to apply technological developments to areas like environmental management , energy etc…”

    and that’ll take a another world war or the collective realisation that huge amounts of government spending in technology programmes is the only viable way forward.

  10. alainton says:

    Im generally with Neil on this but

    1) putting something back through a cycle requires energy – even storing information on a hard drive does

    2) As for exponential growth all compounding of profits and interest will generate this, what really matters though is whether the rate of increase is high in heavily resource consuming sectors or not – you could have for example have negative growth in resource hungry sectors because demand for those resources are declining and slow but none the less exponential growth in other energy efficient sectors.

    So from the above you could still have economic growth at 2% say if overall physical resource use was declining by more than that.

  11. Steve Hummel says:

    “Economics is how we organise ourselves, the more organised we are the more effective we are at performing any function and the more we learn about the nature of the environment we are in.”

    Actually we organize ourselves based on an economic system whose PRIMARY purpose is profit. That’s why we act so unwisely economically, so often. Wisdom comes primarily through integrative thinking. Integrating true human wisdom throughout human society, and particularly in economics which is the discipline that most occupies our time and effort, is therefore essential.

  12. Pingback: Nowhere to Grow | Steve Keen's Debtwatch

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