Inflation or Noflation?
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.
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.
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.
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)|
*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…