Expert Commentary

Australian Price Deflation Could Spiral

Australian price changes turn negative and debt is high.

Australia is known as “the lucky country” thanks to the title of the book written about it in 1964. The term is generally used positively to describe Australia’s abundance of natural resources in particular, despite the intention of the book as portraying the country as being fortunate to have gained such wealth and power.

Australian consumer prices have just declined at the fastest quarterly rate since 1931, in the midst of the Great Depression, contracting at 1.9% in the June quarter. That translates to an annual deflation rate of 0.3%, the first time the consumer price index has declined on an annualized basis since 1998. As the chart below shows, Australian consumer prices have been on a long-term disinflation trend for decades. This current lurch into price deflation may well stick.

A number of Covid-related aspects contributed to the decline, particularly a collapse in child-care prices as people stayed at home. However, one aspect gaining attention is that rent prices declined again. Nationally, rents fell for the first time on a quarterly basis since 1972, whilst in Sydney they have contracted now for four consecutive quarters.

Declining rental prices are an issue for Australia where much of the population invests in property to rent out. A recent report from the Reserve Bank of Australia notes that with Australia’s household debt being amongst the highest in the developed world, it poses an increased threat in an economic downturn. The report highlighted that the growth of household debt reflected, in large part, the direct ownership of rental housing.

If rental income is falling, Australians may find it increasingly onerous to service their mortgage debt. That sets up a classic situation of debt deflation, whereby properties are sold, leading to lower prices and a deflationary spiral.

Australia’s luck might just be running out.

Australia CPI from 1949