Why is inflation so low?

I read one report from America which was too complicated to understand and another report from Australia which I understood and the claim was that the economy is weak, that people aren't spending money so businesses can't drive up prices. It said the RBA raises rates in a strong economy to discourage people from borrowing and encourage them to save. That all seemed really straight forward and easy to understand. But is it true?

 

The last thing Australia needs is for interest rates to go up.
It does not seem that long ago when I was paying over 8% on a home loan.
If rates were to go that high again, it would be a 70% increase in interest payments for everyone.
Thats about the same in percentages as to what happened in the 1980s when rates went up to 17.5%.
And they were getting yields of around 6-9 % ,with many breaking even or just making a small profit before rates shot up again.

 

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If my understanding is correct the rba can't raise rates because there's already a lack of spending. Raising rates will just encourage even less spending by people borrowing less and saving more.

 

That's the difference between the US compared to Australia ..
From what anyone can read Americans are committing just under half their yearly expenditures under "Mr-Trump" to nonnecessities..
While in Australia most Economists know that consumption is vital for a expanding nation ,and if the interest rates go skywards in America where funding comes from the RBA will have only one way to go..imho..

 

Good comment. People often forget that a significant amount of bank funding is sourced from overseas.

 

Cannot highlight enough the point Willair made here above. One of the biggest economic risks for Australia is the possibility of low/no inflation whilst long term interest rates overseas continue to climb.

Frankly regardless of what level of inflation is occuring... I cant see that the RBA has much of a choice here if US long term treasury yields keep rising (and I believe they will) there is only one way rates in Aus can go and that is up.

It could be disastrous for Australia if it played out without very very careful management, I think real co operation between RBA/banking regulators and our big 4 banks will be needed to see us through it without trouble.

 

In order to attract investment, our interest rates must be higher than the US (within reason).

 

The difficulty for the RBA at the present is that they know they would need to drop official interest rates two percent rapidly in order to stem off a financial stress event and keep the economy moving. They simply do not have the capacity to do that.

Keeping rates at emergency levels for a long time will likely trigger such an event as personal debt goes higher. The government can stem things with increased infrastructure funding and local jobs but that only goes so far. The reality is that interest rates will go up and some point and it's likely they will go up fast with banks with US economic growth.