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.
United States & British Inflation plummets
In latest reports from Britain and the US, inflation has plummeted in both economies amid worsening economic conditions that have dragged thw world economy into an impending global recession.
In the US inflation fell at the fastest rate in 61 years in October as consumers have stopped spending and retailers attempt valiantly to maintain demand. Consumer prices dropped by 1% as fuel prices alone dropped by 14.2% in October.
In Britain, the annual inflation rate in October fell to 4.5% from 5.2% in September, the first fall in 14 months. The fall is the biggest monthly fall in 16 years as the global economy falters.
The news from the US and Britain confirm the respective central banks views that inflation would fall and locks in bigger than expected rate cuts on the way.
Poll - How low with the Reserve Bank of Australia rate go in 2009?
The Australian Bank Watch site has created a new webpoll to see where our visitors think the Reserve Bank of Australia’s interest rate will be at the end of 2009?
The RBA has acted swiftly in recent months in response to the growing global credit crisis and in October cut rates by a surprise 100 basis points.
The RBA followed suit again on Melbourne Cup day, the 4th November, delivering another 75 basis point cut to take the rate cut in the last two months to a massive 175 basis points.
This sizable cut reflects the genuine concern the RBA shares with regard to not only the health of the global economy but it’s effect on the domestic economy and domestic consumption.
Already unemployment has shown signs of rising, consumer spending has slumped, the AUD had been smashed and the the previously unstobbable commodity boom has slowed considerably.
The RBA have indicated a likelyhood of further cuts but are also tempered by inflation and any interest rate cuts will be impacted upon by the inflation rate that with be high on the Glenn Stevens mind come future rate cuts.
I am tipping an RBA rate of 3.75% by the end of 2009. It’s a bold prediction of 1.5% below current levels but I suspect this is where it will need to fall before it can stimulate the domestic economy.
What do you think? Take our poll and share your prediction or comments on the RBA rates outlook.
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.