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…

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.