Wednesday, 22 July 2009

Forget those deflationary blues

At various stages of this world financial crisis a major concern of some economists has been that we would enter a period of deflation similar to that which occurred in Japan during the 1990s. Such a fate would see growth stop as people put off buying today what they knew would be cheaper tomorrow.

It was indeed a frightening prospect for those of us grown used to steadily increasing prosperity but we can probably worry no more about such conditions occurring any time soon. The June quarter consumer price index figures from the Australian Bureau of Statistics out this morning point to our next major economic problem being a good old and orthodox inflationary one. For while the June figures of a quarterly increase from March of 0.5 per cent and a change from the June quarter of 2008 to June 2009 that was just 1.5 per cent there were signs that underlying inflation is still on the high side.

When the Reserve Bank peers into its crystal ball to determine what interest rate is needed to keep price increases under control it takes the ABS figures and fiddles around to take out the most volatile items and produces what it calls a weighted median and a trimmed mean — two ways of looking at what is really happening to prices. It is only when these two measures put inflation in the range between two and three per cent that the Reserve Bank boffins express satisfaction.

Alas there is no satisfaction this morning in that 1.5% figure for the dreaded weighted median is still uncomfortably high at 4.2% with the trimmed mean also on the high side at 3.8%. This can be seen as a warning sign that the conditions the Bank feared only 18 months ago would cause an inflationary problem are still potentially with us. And if you wanted to be a gloomy fellow you would say that the difficulties governments throughout the world are going to have paying off their newly accumulated debts incurred in the name of fiscal stimulation are beginning to create circumstances where a a fair dinkum bout of inflation is their only way out.

A summary of this morning’s figures:

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