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A Ring-Side Seat to Australia's 2016 Fight Against Deflation

Australia's financial authorities are in a protracted fight with deflation.

First, the National Australia Bank described the core inflation rate for Q1 of 2016 as "the lowest ever." An April 27 Sydney Morning Herald headline said:

Australia sees deflation for first time in seven years

During those first three months, the consumer price index had contracted by 0.2%.

A classic deflationary mindset had taken firm hold by summer. Shoppers had become desensitized to store sales in the nation's largest city (Fortune, July 25):

Signs announcing a sale are almost permanent fixtures in shop fronts in Sydney, but customers are still wary of spending.... "We're doing sales all the time now, all the time. It's mental," said an employee of fashion store Page One in central Sydney.
Yet a 40% discount has not prevented a near 50% slump in sales revenue between January and June at the store.

Also, July data showed that consumer price inflation had slowed to 17-year lows in the June quarter.

This chart shows Australia's CPI from 2000 through June 2016 with comments from Elliott Wave International analyst Chris Carolan below:

AustraliaCPI

Inflation has been falling since 2014 specifically when it topped at 3% but disinflation has really been in play since 2008 when CPI topped at 5%. As you can see on the chart, not only has disinflation been rampant for 6 years, the recent print below 1% took out the lows from 2009. You don't have to be a chart detective to see that trend has further to go.

As you might imagine, these troublesome developments since the start of the year captured the full attention of the Reserve Bank of Australia.

On Aug. 2, the central bank cut its cash rate to an all-time low of 1.5%, its second easing of the year. But the RBA's easy money policy has proven ineffective as inflation continues to be subdued. On Nov. 1, the RBA announced that it would leave their cash rate unchanged at 1.5%.

Meanwhile, neighboring New Zealand has also been bedeviled by the prospects of deflation. Here, too, the fight has been protracted. Here are headlines from the last three years:

  • Deflation risk rising amid slow growth (Radio New Zealand, Oct. 20, 2014)
  • NZ heading for deflation, leaving central bank hamstrung (New Zealand Herald, Jan. 9, 2015)
  • New Zealand on Deflation Brink as Prices Fall More Than Forecast (Bloomberg, Jan. 19, 2016)

On Aug. 11, 2016, the Reserve Bank of New Zealand cut their rate to a record low 2%.

But, as recently as Oct. 20, 2016, the New Zealand Herald reported:

Consumer Price Index data released this week showed annual inflation dropping to just 0.2 per cent from 0.4 per cent.

Like Australia, New Zealand's central bank policy has, so far, proven ineffective.

Both country's fight against deflation is far from over.

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