Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 321

Six suspects in the murder of inflation

What happened to Harold Holt? How did we allow mullets to become fashionable? Who murdered inflation? These are some of Australia’s greatest mysteries, and economists have felled many a tree in recent years expressing their bewilderment that inflation has vanished without a trace.

The whereabouts of inflation in Australia and other major economies has been a monetary mystery for more than a decade now. According to economic theory, low interest rates should increase consumption and borrowing, increasing demand and resulting in higher prices. According to economic theory, low unemployment should force employers to offer higher wages as a way of competing for scarce talent. So, who could be responsible for the murder of inflation?

We’ve enlisted the assistance of Hercule Poirot, Sherlock Holmes and Jacques Clouseau to narrow down a list of suspects:

Suspect 1 - Amazon Armageddon: Increased globalisation has resulted in many Australian businesses having to keep prices low to remain competitive. This is particularly relevant for Australian retailers, who are struggling to keep up with the likes of Amazon.

Suspect 2 – The Grocery Wars: The price war between Coles, Woolworths and Aldi has helped keep a lid on inflation. A PwC report found that Aldi’s presence in the Australian market has resulted in Australian shoppers saving more than $2.5 billion per year.

Suspect 3 - Follow the Money: The RBA has been lowering interest rates since November 2011. Total credit in the economy has increased by $890 billion since then, with housing loans accounting for 70% of that new debt. Australians didn’t respond to lower rates by taking out more personal and business loans and stimulating economic activity as the RBA may have hoped, choosing instead to borrow up to their eyeballs in housing loans. At least there was inflation in property prices!

Suspect 4 - Underemployment: The ABS considers someone employed if they work more than one hour a week, meaning that low unemployment figures may be misleading. Underemployment, which measures workers who are employed but want to work more hours, is historically high. It should be no wonder that wage growth is non-existent when there are more than a million Australians looking for more work.

Suspect 5 - Not just call centres: Cheap foreign labour is typically associated with the decline of Australian manufacturing jobs, however thousands of white-collar jobs in Australia have been lost to ‘outsourcing’ (corporate Australia loves a euphemism!). As profit margins get squeezed, Australian companies can save up to 70% on wages by shipping low-skill jobs overseas. This trend will only accelerate as the quality of foreign labour increases, with high-skill white-collar jobs increasingly at risk.

Suspect 6 - Running out of luck: The Australian economy remains anaemic, as reflected by its woeful productivity growth figures and per-capita recession. China is building 20 million square metres of new floor space each month – for reference, the total floor space of Sydney’s CBD is 17 million square metres. If China decides to stop building a new Sydney CBD each month, the demand for our major commodities will plummet and our much-treasured streak of 27 years without a recession will almost certainly end.

Who do you think pulled the trigger? Did the suspects work in cahoots? Were there other accomplices? Despite having a rock-solid alibi, the RBA appears to have pinned the murder of inflation on interest rates being too high. Sherlock Holmes once warned that we should twist our theories to suit facts and not the other way around. Rather than relying on conventional economic wisdom to solve this mystery, we should ask ourselves a simple question – why would prices and wages be rising in the first place?

Lowering interest rates further does nothing to improve the Australian economy, which needs major reforms to improve the quality of its labour force and business conditions. Although it is undoubtedly a foreign concept to them, our dear leaders in Canberra may actually need to stop sharpening their knifes and do some work. At this stage, we may as well save on the labour costs and outsource our politicians to the Philippines!

 

Nicholas Stotz is Investment Research Analyst at advisory firm, Stanford Brown. This article is general information and does not consider the circumstances of any individual investor.

 

5 Comments
Stuart
September 04, 2019

Great article. Did you miss demography? Extending lifetimes and health, Too many retirees or early retirees causing the money cycle to bog-up as they assume living healthy life to 99 and sit on savings accordingly.
Although the counterpoint is reducing % of population of working age would push inflation higher (but that has been counterbalanced by net immigration).

Gary Judd QC
August 31, 2019

Aren’t the economic laws concerning supply and demand the relatively simple and obvious answer to the question?
Increase the quantity of goods and services whilst keeping the money supply the same and prices should go down. Lowering interest rates, and QE more so, increases the money supply. If equilibrium occurs prices should remain the same.
If the increase in the money supply exceeds the increase in the quantity of goods and services, prices should go up.
Prices as measured by the CPI haven’t gone up much because the quantity of those goods and services has increased, but prices of many other goods and services which are not measured by the CPI, have increased. Mainly those where there are constraints on supply such as land and buildings. And other assets such as bonds and shares which have been in high demand because interventions by the government and its agencies have disincentivised reliance on traditional savings vehicles.
If the market were allowed to operate without interventions, these distortions would not exist.
Prices of CPI goods and services would have decreased. Asset prices would not have skyrocketed. This would have been good, not bad.

Nicholas Stotz
September 01, 2019

Hi Gary,

Completely agree with your comment, as up until recently I was a card-carrying libertarian (I can still watch Thomas Sowell videos for days). All of my points above boil down to supply and demand issues (e.g. higher supply of providers selling consumer goods capping prices, higher supply of global labour putting pressure on wages, etc).

Couple of comments to add:
- Increasing the money supply should increase the price of goods, assuming that the velocity of money stays the same. It's all well and good for Josh Frydenberg to say that we consumers should spend their tax cuts and that companies should increase their investment in Australia, but if the economy was healthy consumers and companies wouldn't need any encouragement. To me that's evidence of a weak velocity of money.
- I'd argue that we have low inflation because we've allowed the market to operate without interventions. Yes we have a major distortion in terms of interest rates, but for the most part we've allowed consumers and companies to freely choose lower cost alternatives (Amazon, low-cost foreign labour, etc). The taming of inflation in recent decades probably has more to do with the liberalisation of the Australian economy than any interest rate decisions made by the RBA.

Cheers,
Nic

Dave
August 28, 2019

I love the last sentence in your article. If only

Nicholas Stotz
August 29, 2019

We can dream Dave!

Hope you enjoyed the read.

Cheers,
Nic

 

Leave a Comment:

RELATED ARTICLES

The seeds of a downturn, and opportunity

Buying resource and consumer staple stocks

Trump vs Powell: Who will blink first?

banner

Most viewed in recent weeks

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Latest Updates

Superannuation

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Superannuation

Less than 1% of wealthy families will struggle to pay super tax: study

An ANU study has found that families with at least one super balance over $3 million have average wealth exceeding $19 million - suggesting most are well placed to absorb taxes on unrealised capital gains.   

Superannuation

Are SMSFs getting too much of a free ride?

SMSFs have managed to match, or even outperform, larger super funds despite adopting more conservative investment strategies. This looks at how they've done it - and the potential policy implications.  

Property

A developer's take on Australia's housing issues

Stockland’s development chief discusses supply constraints, government initiatives and the impact of Japanese-owned homebuilders on the industry. He also talks of green shoots in a troubled property market.

Economy

Lessons from 100 years of growing US debt

As the US debt ceiling looms, the usual warnings about a potential crash in bond and equity markets have started to appear. Investors can take confidence from history but should keep an eye on two main indicators.

Investment strategies

Investors might be paying too much for familiarity

US mega-cap tech stocks have dominated recent returns - but is familiarity distorting judgement? Like the Monty Hall problem, investing success often comes from switching when it feels hardest to do so.

Latest from Morningstar

A winning investment strategy sitting right under your nose

How does a strategy built around systematically buying-and-holding a basket of the market's biggest losers perform? It turns out pretty well, so why don't more investors do it?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.