Australia ‘locked’ into low inflation and low wage growth, economists fear

Australia is having the longest period of low inflation since the late 1990s and economists are predicting it could stretch for another two years.

It means the economy may only be halfway through its low inflation cycle, raising questions about inflation expectations and future wages growth.

The Bureau of Statistics released inflation data for December on Wednesday, showing annual underlying inflation at 1.9%.

Inflation has now been sitting below the Reserve Bank’s 2%-3% target band for two years, in underlying terms, prompting comparisons to the run of weak inflation Australia experienced between 1996 and 1999.

Economists say Australia appears to be “locked” in a low inflation environment, where the sectors experiencing modest inflation, such as tobacco, housing and health, are being offset by the disinflationary pressure of the competitive squeeze in consumer goods, with no circuit-breaker in sight.

The Westpac economist Justin Smirk wrote to clients on Wednesday: “There are no signs of a broader cyclical upswing in prices that you would normally expect to see at this stage of an economic recovery.”

The data shows inflation was highest in December in petrol (10.4%), fruit (9.3%), tobacco (8.5% after a tax rise in September) and domestic holiday travel and accommodation (6.3%).

The most significant offsetting price falls occurred in audiovisual and computing equipment (-3.5%), international holiday travel and accommodation (-1.7%), telecommunication equipment and services (-1.4%), furniture (-0.8%) and clothing (-0.3%).

Inflation was unevenly distributed across the country.

Commonwealth Bank economists Kristina Clifton and Michael Workman said there was a noticeable divide between Australia’s east and west coasts, with annual inflation in most of the east coast cities running above 2%, in part due to stronger jobs and housing markets, while inflation in Perth and the Northern Territory was very soft.

On the drivers of Australia’s persistently low inflation, they said increased global and domestic competition was an important factor, along with changes in the Australian dollar.

“Tradables, or imported inflation, is in negative territory over the year (-0.3%),” they wrote. “Clothing, communications and household goods are categories that are highly exposed to global trade and are subsequently under considerable downward price pressures.

“In contrast, tradeables, or domestic inflation, is lifting (3.1%), although still below its long run average rate.”

The chief economist of Capital Economics, Paul Dales, said that, despite annual inflation running at 1.9%, the six-month annualised growth rate, which provides a better picture of the latest trend in inflation, fell back to 1.6% in December.

He said the Reserve Bank was unlikely to lift interest rates until 2019.

“There is little reason to expect underlying inflation to rise much if wage growth stays low (as we expect) and if the dollar stays strong (which is less likely),” he said.

Dales said workers’ inflation expectations were still relatively healthy but if low inflation persisted for another two years it could have consequences for Australia’s record-low wages growth.

“If inflation’s low then inflation expectations tend to be low, so I would expect that low inflation will reinforce low wage growth, and it’s hard to snap out of that [when it happens],” he said.

The Labor leader, Bill Shorten, this week signalled an intention to significantly boost the minimum wage for low-paid workers by calling for a “real living wage” and noting that the minimum wage has been going “backwards relative to median wages for years”.

With federal parliament set to resume next week, Shorten laid out Labor’s agenda for 2018 at the National Press Club, focusing on cost of living pressures and ultra-low wages.

Annual wages growth is currently 2%, a near-record low.

The latest figures from the Department of Jobs and Small Business show the average wage rise for enterprise agreements approved in the September quarter last year was a record low at 2.2%.