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

Time to announce the X-factor for 2024

banner

Most viewed in recent weeks

Australian stocks will crush housing over the next decade, one year on

Last year, I wrote an article suggesting returns from ASX stocks would trample those from housing over the next decade. One year later, this is an update on how that forecast is going and what's changed since.

What to expect from the Australian property market in 2025

The housing market was subdued in 2024, and pessimism abounds as we start the new year. 2025 is likely to be a tale of two halves, with interest rate cuts fuelling a resurgence in buyer demand in the second half of the year.

Howard Marks warns of market froth

The renowned investor has penned his first investor letter for 2025 and it’s a ripper. He runs through what bubbles are, which ones he’s experienced, and whether today’s markets qualify as the third major bubble of this century.

9 lessons from 2024

Key lessons include expensive stocks can always get more expensive, Bitcoin is our tulip mania, follow the smart money, the young are coming with pitchforks on housing, and the importance of staying invested.

The 20 most popular articles of 2024

Check out the most-read Firstlinks articles from 2024. From '16 ASX stocks to buy and hold forever', to 'The best strategy to build income for life', and 'Where baby boomer wealth will end up', there's something for all.

2025: Another bullish year ahead for equities?

2024 was a banner year for equities, with a run-up in US tech stocks broadening into a global market rally, and the big question now is whether the good times can continue? History suggests optimism is warranted.

Latest Updates

Shares

Howard Marks warns of market froth

The renowned investor has penned his first investor letter for 2025 and it’s a ripper. He runs through what bubbles are, which ones he’s experienced, and whether today’s markets qualify as the third major bubble of this century.

Property

What to expect from the Australian property market in 2025

The housing market was subdued in 2024, and pessimism abounds as we start the new year. 2025 is likely to be a tale of two halves, with interest rate cuts fuelling a resurgence in buyer demand in the second half of the year.

Superannuation

How to fix the Commonwealth Superannuation Scheme

The scheme has not been updated since it was established and is no longer fit for purpose. Members now find themselves disadvantaged in several important ways versus those in other superannuation funds.

Investment strategies

5 key investment themes for the next decade

AI has helped markets to new highs and rightly dominated news headlines. Yet there are other themes, including niche ones such as gene editing, which are also expected to drive investment returns over the next decade.

Shares

New avenues of growth make 2025 exciting for investors

Investors need to be more discerning this year as headline valuations are high and the economic cycle turns. Dig a little deeper, though, and there are big opportunities in overlooked shares with strong tailwinds.

Investment strategies

The pros and cons of debt recycling strategies

Debt recycling is a powerful strategy for those juggling the seemingly competing goals of debt reduction and building an investment portfolio. Yet it's often misunderstood because it isn't just a single strategy.

Investment strategies

Australia is out of step on nuclear power

Globally, nuclear power is gathering momentum as a differentiated power source in the energy transition to zero carbon emissions. Yet in Australia, a nuclear ban remains, making us an outlier among our Western Allies.

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.