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.