First quarter inflation - 0% - Rate cut on the way

Several news articles this week talking about first quarter inflation number - 0%!

Surely RBA will need to take action, lots of numbers starting to look a bit shaky in the AU economy. Though maybe they will wait after the election?

Never thought I would say it but maybe we need the ALP government to get in and start splashing some cash around to stimulate the economy a bit!

Huge warning sign for Australia

 

Yes, cause higher wages without increased productivity, spending money we haven’t saved and printing money worked out so well for Venezuela, Zimbabwe, pre war Germany etc etc.

 

OK i take it back, things aren't that dire that we need to do anything reckless like voting ALP.

However I would challenge your examples of fiscal stimulus. Didn't work out so well for those countries agree, but seems to have worked petty well so far for US and China. Both sides of Australian politics need to stop obsessing so much over scraping through a budget surplus and focus more on stimulating the economy when there are warning lights starting to flash.

 

No wonder the AUD$ took a nosedive a few days ago.

 

I’m not convinced a rate cut would make much difference to the inflation rate. In order to get the inflation rate up to healthier levels, more economic activity is required. With world economic activity beginning to slow (in particular China who receive 30% of our exports), the RBA needs for consumers - whose spending constitutes about 60% of GDP - to start opening their wallets. This seems unlikely in an environment where wage growth has stalled and there are record levels of consumer debt.

 

Possible solution...

Reserve Bank should call in the helicopters to drop money on Australian households: Citi - ABC News (Australian Broadcasting Corporation)

 

Governments can't stimulate the economy. Governments don't create wealth, they only redistribute it. Only the private sector creates wealth.

Fiscal stimulus, monetary stimulus, these are just redistributions.

So no, no more fiscal redistributions please.

 

Cutting is gonna be a blow to sentiment on the economy and erode what little powder the RBA has left. IMO they won't cut until things get worse, likely a spike in unemployment, but I'm sure they would prefer an external shock to force their hand as it would save them face, politically.

 

The RBA have a tough job no doubt but they have one measurable objective - target inflation in the band 2-3%. They have not met this objective for several years now, one could argue it is a bit late for saving face.

Now, I get that there are a million and one external factors that cause this, I get that the RBA don’t have a lot of room to move on rates and going lower may have minimal impact and make them uncomfortable and leave nothing up their sleeves blah blah blah.

Their mandate is 2-3% inflation and that has yet to happen under the entire tenure of Mr Lowe so perhaps they need to stop sitting on their hands and take some action, be it via rates or some other lever.

 

This sound like something from an economics textbook but I don’t think it is that simple in reality. How much household wealth has evaporated due to changes to APRA lending guidelines?

Government can cause massive changes to both real economy and sentiment. They can switch on or off the “animal spirits” of the private sector with the stroke of a pen.

 

Hmm...

Exhibit A: Government builds a motorway. Government sells it cheaply to the private sector, lets call them CrossMetro, a listed entity whose boardroom is a departure lounge for ex politicians who have lobbied for "privatisation".

CrossMetro quickly establishes a monopoly over every toll road in the country, collecting tolls which are set by the government, not by the market.

Your homework question is: Who created the shareholder wealth?

Exhibit B:
The average Private Health Insurer returns to members 85% of premiums paid in benefits.
The Government contributes 25% of the average private health insurers revenue so as to reduce the cost of premiums paid by the customer.

Your homework question is: If the final profit number of the average private health insurer would be less than zero without those government contributions, who is currently creating shareholder wealth in the health insurance industry?

Need me to continue with the private education/university industry? Or the Aged Care sector? Or the Immigration Detention Centre Operator sector....?

No... it's definitely not solely the Private Sector creating wealth in this country... it's a boat load of rent seekers suckling off the taxpayer because their industry cannot support themselves.

 

They did take action over 6 years , but we blew the money on unproductive assets.and a government that was unwilling to seriously make any changes.
Its a bit late now to be expecting the RBA to pull us out of this mess.
Had wages kept on growing the banks would not be under so much pressure for responsible lending and checking actual living expenses,
Expecting business to help "keep the costs of living low" is a waste of time , as one of their biggest costs is labour and it puts them under pressure to contain costs and control wages with a tight rein, which is the very people that they want to go out and spend money.
Would you just give an addict or an alcoholic more money so he or she can feed themselves.
You know where the money is going to be spent , but you really need to deal with the addiction first.

 

The hurdle for Lowe to go deep into negative real rates and take the cash rate to 1% is big. We're not there yet. UnM data confirming a proper trend, or big consecutive retail sales miss are key as the RBA have hinted.

 

I will be surprised if they cut rates prior to the election. I think the last time this happened was prior to the Kevin 07 election where they were raised and the coalition was spitting chips! Of course, it could happen but given the focus on housing policy this election it would be a big lever to pull at this time when it's not absolutely necessary yet.

- Andrew

 

Wouldn't it be smarter to at least wait until after the election before any group does anything. That way you know whether it will be a Labor or a Liberal government and where they are likely to lead.

 

Wage growth has stalled for 7-8 years, spending was also on the rise during most of that time, debt has got cheaper. Surely there is plenty of wiggle room to drop prices or improve services to stimulate economic activity

 

We need all 3. Not IR cuts.
Right now we have:
* extended bracket creep: extra dollars are just being paid back to govt by a significant propn of working population
* extended period of no wage rises: don't always have to rise but should be keeping pace. Better than going backwards! Watch this space.
* too many imbeciles in jobs they can't do: leads to unqualified, unsuitable , unmotivated workers leads to poor production, no competition.
* borrowers with poor to above average servicing being forced onto P & I payments: the rich get richer and all that (though I do agree that too much IO was available in unsuitable situations)
* Droughts and floods affdcting grocery bills
* Energy costing too much, etc

None of these is a problem on its own, but put it altogether and it adds up.
To its credit, the current government has initiated spending on infrastructure.
Interest rates are still delightfully low (nothing to do with any government)
But why does Everyone have to be employed? It's better to have just a little slack.
When we don't have a reasonable pool of unemployed, the wrong people end up doing the jobs.
For example, the RC into aged care and perhaps disability will probably result in higher qualificatins needed for employees in these areas and ever-increasing vigilance in the checking of care provided.
However, that's going to require more jobs, and to attract the 'right people', higher wages and better conditions for workers. And there's already a dire shortage of staff; it's not everyone's first choice because the 'reward' is purely intrinsic atm.
Which means that tertiary institutions need to be strongly supported, not diminished.
Same goes for tradies where there is still not enough competition and the existing survivors are continually over-worked.
These are just two examples.

 

Thanks Marty 998,

Even in your examples, the government didn't create any wealth. Your examples of private health insurance, and private companies delivering foreign policy are all subsidies. Health, education, foreign policy don't operate in a free market.

In order to build a road say, first they had to tax the productive sector of the economy. Then they built the road, but without a profit motive I suspect they didn't do it efficiently (without profit there are no signals to tell you if you are combining resources efficiently or not). Did that road need to be built? Was it built for political or economic reasons?

This is not an argument that we don't need governments. We do need governments. It's just an economic truism that they don't create wealth.

If governments created wealth, North Korea would be wealthier than us.

Totally agree with your point about rent seekers - so I do understand what you are suggesting: but this is wealth redistribution to politically favoured people from the productive sector, and wouldn't occur in a free market. So no net wealth has been created.

 

How do you reconcile this theory with the US quantative easing program? US Fed literally creating wealth in the most purest sense. And they managed to do it without any meaningful inflation too, maybe the RBA needs to take a page out of their book...

 

The first thing to say is that we are defining inflation incorrectly.

Inflation is the expansion or contraction of the money supply. So there is actually unprecedented inflation, it just hasn't lead to higher prices yet. But it will.

The second thing to say is that CPI is a terrible measure for inflation. CPI measures only consumer goods, and even then it strips out food and energy.

There was loads of inflation, but the inflation went into asset prices, not consumer prices.

Last thing to say about CPI price increases: there is a lot of money and credit creation which by definition is inflationary. But there has been very little velocity. Ie, loads of money, but if no one spends it it doesn't translate into higher prices.

Part of this is a lack of confidence, another part is higher regulation post 2008 - these are deflationary factors. Another part is demographic - no matter how much credit the central banks create, baby boomers just don't want to buy more property.

Hope this helps.