Is Deflation set to rise?
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Inflation seems dead in the leading world economies with the US announcing that inflation grew at it’s slowest price since 1954. The falling inflation rate leads to fears that deflation, one of the most feared concerns for financial watchers is set to re-appear.
Japan have been struck with deflation on and off for the best part of 20 years and the Japanese market has not reached anywhere near it’s highs of the late 1980s. With consumer prices falling heavily along with the price of oil driving the price of goods and services lower the leading world economies could soon be looking over their shoulder at the rise of deflation.
Deflation is an economy destroyer and not only destroys confidence but can lead an economy into a very deep recession or even a depression with the price of goods tomoorow being cheaper than today. This flows through into job cuts and lack of wage increases. It slowly tears out the heart of the economy.
If your looking at the impact of deflation in the economy then closely look at the impact it has had on Japan in the last 20 years. On the surface Japan may not look to be that bad but the damage deflation has done to the psyche of the economy is stark.
Let’s hope we are not seeing the signs of deflation emerging in the global economy.
Inflation plummets
Inflation fell by it’s biggest amount in six years further locking in hopes for a 100 basis point cut by the Reserve Bank this week.
Economic data also confirmed manufacturing fell each of the last six months to a record low as the declining economic growth further confirms a sharpening contraction.
Some economists are now predicting levels around 2.50% to 2.75% by the middle of 2009 as Australia verges on recession.
RBA cut growth forecast to 1.5%
The RBA today announced a cut to the growth forecast to the end of December of 1.5%, this is down from the IMF forecast of 1.8% and the 2% forecast only in August.
The RBA announcement was in the November Statement of Monetary Policy. The RBA also forecast a drop in the inflation rate to 3% by the middle of next year.
It would seem the RBA statement further vindicates future cuts to the RBA rate. The interbank futures are already factoring in a forecast RBA rate of around 4% and various investment bankers expect the RBA rate to fall to 4% by the middle of next year.
Has Australian Inflation peaked?
The Australian Bureau of Statistics revealed yesterday that annualised inflation had hit 5% in the September quarter. Excluding volatile items it was 4.6% still well above the rate the RBA have traditionally been happy to accept.
The RBA have indicated that the likely pressure on inflation will disappear through 2009 as slowing ecomonic growth, consumer demand and increasing jobless figures help drag down the inflation rate.
But the question begs what if the inflation risk does not disappear in 2009. We are likely to see as much as 1.5% come off interest rates in the next 12 months, perhaps more should the economic climate deteriorate further than expected. This would take the RBA cash rate down to 4.5%.
If inflation continues to persist as some economic forecasters speculate then the Australian and world economies could be heading for a disaster. The jury is still out at this stage but economic forecasters are sitting on both sides of the fence.
Do you think our inflation rate has peaked? Share your thoughts in our comments section.
Australian Inflation hits 50% in Sep quarter
The Australian Bureau of Statistics announced today that Australia’s headline inflation rate came in at 5.0% on an annual basis. The CPI rose 1.2% for the quarter ended 30 September 2008.
The inflation rate was the highest since 1995 as CPI excluding housing, financial and insurance services rose by 0.7% in the September quarter for an annual rate of 3.8 per cent.
The rate excluding volatile items was 4.6% annually, this is the inflation rate more often considered as the most accurate reading of inflation by the RBA.
The RBA had earlier indicated an expectation of the inflation rate to be around 5.0% and the high rate is unlikely to deter the RBA from making future cuts to interest rates.
The RBA have indicated that the inflation rate is likely to subside in 2009 as the economic slowdown take further hold on the domestic economy.
Click ABS to read the Media Release.