Economic Analysis of Australia's Inflation Rate in Q1 2019

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Huge warning sign for Australian economy
(by Economist Jason Murphy. Article published in news.com on 26th April 2019)
Australian Bureau of Statistics (ABS) reported Q1 2019 Inflation for Australia as zero.
Does that mean good or bad for the Australian Economy? Economist Jason Murphy
talks about this in an article published on April 26th on why it is a warning sign for the
Australian Economy. The purpose of this review is to understand the importance of
inflation for an economy and analyze ideas presented by Jason in his article.
Inflation in simple terms is referred to as increase in prices of household goods and
services. Consumer Price Index (CPI) is one of the most important indicators of inflation
and is measured as percentage change in the price of the basket of services and good
that a household buys (ABS,2019). ABS is the authority Australia that calculates and
publishes CPI every quarter. ABS looks at prices of thousands of products across 86
categories to calculate change in prices of every product and then aggregate it to
calculate CPI. (ABS,2019)
There are primarily 4 terms when we talk about inflation. 1) Inflation: Meaning positive
increase in prices of products and services (Or positive CPI) 2) Deflation: Meaning
negative CPI 3) Disinflation: It means thought there is some +ve inflation but it is
declining. 4) Hyperinflation: Meaning extremely high levels of inflation. (Global
Economy, 2019).
High inflation would mean the price of products and services are rising and therefore
one can now buy lesser with the money they have. Thus the worth of the money one
carries decreases with inflation. It is therefore too much inflation is not considered good.
But that does not mean there should be any inflation at all (Mark et al 2019). Deflation is
a problem too. Deflation often creates problems of downward spiral. With prices falling,
people often delay their purchases with the hope that prices will fall further in future.
This impacts the growth of the economy as the consumption falls. It is therefore always
important to have certain level of inflation (Mark et al 2019). Though there is no right
threshold for what the inflation should be it is often considered that 2-3% of inflation
year on year is a good sign of healthy economy. Generally, federal banks in countries

target to have desired rate of inflation and try to achieve it through changing monetary
policies like interest rate changes. In Australia, Reserve Bank of Australia (RBA) fixes
the Inflation targets and works through its monetary policies. Currently RBA has fixed
inflation rates of 2-3% for Australia year on year (RBA, 2019).
As per the data published by ABS for Quarter 1 of 2019, inflation for Australia has
remained flat over previous quarter and is just 1.3% year on year (ABS, 2019). Purely
going by the numbers Jason is right in saying that something is going wrong with the
Australian Economy and there is warning for the future ahead (Shane Oliver, 2019). If
Australia has to achieve a target of 2-3% this would mean on an average 0.5-0.7%
inflation every quarter. Clear a flat inflation for Q1 2019 is much below this and year on
year inflation of 1.3% is also not favoring well for the economy. Historically, for last two
years Australia has barely crossed the 0.5% year on year inflation. This definitely is a
sign of warning and requires more understanding as to what is causing this and how to
overcome it.
Source: Jason Murphy, 2019 and validated with ABS site 2019

Weak inflation is evident globally with US at 1.8%, Japan at 0.4%, China a 1.8% and
Eurozone at 0.8% (Global Economy, 2019). Technological changes putting downward
pressure on prices and reducing demand for low skilled workers; Globalization leading
to lesser control over prices and wages and the effect of the Global Financial crisis are
some of the factors which is driving inflation down globally (Shane Oliver, 2019). But the
problem with Australia is, Inflation has remained low over years and RBA has missed its
target over and over again.
Some people always argue that why not RBA reduces its target to 1-2% for inflation.
Economy does not work like that. The targets are set at the first place to anchor the
inflation expectations If targets are changes every time with the rise or increase in
inflation then what is the point of setting targets. Also, allowing two low an inflation is a
problem (Shane Oliver, 2019). Most statistical measures used to report inflation often
overestimates inflation by 1-2%. This might can easily mean that the current levels of
1.3% inflation might actually be a deflation for Australian in true sense (Shane Oliver,
2019). Therefore, it is important that measures should be taken to bring back the
Inflation at right levels.
To conclude too high an inflation is bad but too low an inflation (or deflation) isn’t good
either (Global Economy, 2019). Australia strongly needs to look at measures to bring
inflation on track.
One of the ideas to tackle this is rate cuts by RBA. RBA has been targeting rate cuts in
order to control inflation but that hasn’t helped much and inflation continues to be low.
The rates are already at low of 1.5% and any further cuts by RBA might not help in
controlling inflation but rather would make Housing attractive with available cheap loans.
The other idea is if government can stimulate the economy through spending often
called as fiscal policy. Some of the options that are there are - higher spending by
government in health and infrastructure, providing tax cuts to increase disposable
income and higher spending in turn and giving more cash transfers like higher welfare
payments, pensions etc. Some of the opponents of stimulatory fiscal policy might argue
that spending by government to control inflation is not good. But given the current state
where Australian economy is and looking at the rates, rate cut alone is not going to

solve the problem of low inflation and probably a mix of stimulative fiscal policy and
interest rate cuts is the way ahead for Australia in the near term till the inflation reaches
at par with target.
References:
 Australian Bureau of Statistics (ABS), 2019. Consumer Price Index, Australia,
Mar 2019. [online] Available at:
https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Mar%202019?
OpenDocument Accessed on 22nd May 2019
 Jason Murphy, April 26 2019. News.com. “Huge warning sign for Australian
economy”. [online] Available at:
https://www.news.com.au/finance/economy/australian-economy/huge-warning-
sign-for-australian-economy/news-story/5652a90757b67a9611073937e1b6381e
accessed on 22nd May 2019.
 Global Economy, 2019. Inflation: not too little, not too much. [online] Available at:
https://www.theglobaleconomy.com/guide/article/25/. Accessed on 22nd May
2019
 Marc Stocker, Patrick Kirby and Collette Wheeller. MAY 02, 2018. Global
inflation: Stubbornly low, but subject to upward pressures. [online] available at:
https://blogs.worldbank.org/developmenttalk/global-inflation-stubbornly-low-
subject-upward-pressures. Accessed on 22nd May 2019.
 Reserve Bank of Australia (RBA). 7th May 2019.Inflation target. [online] Available
at:
https://www.rba.gov.au/inflation/inflation-target.html accessed on 22nd May
2019.
 Shane Oliver, April 29 2019. “Inflation undershoots in Australia – why it’s a
concern, is the RBA running out of ammo & what it means for investors?”.
[online] Available at:
https://www.ampcapital.com/au/en/insights-hub/articles/2019/april/inflation-
undershoots-in-australia-why-its-a-concern accessed on 22nd May 2019

 Stephen Long, April 24th 2019. Inflation rate of zero not as good as it sounds.
[online]. Available at:https://www.abc.net.au/news/2019-04-24/inflation-rate-of-
zero-not-as-good-as-it-sounds/11043100 Accessed on 22nd May 2019.