Australia faces a period of economic stagflation

by Shaun Richards

Today we can take one of our regular trips to a land “down under” and we find that in economic terms there is a lot going on. We can start with the Reserve Bank of Australia and this morning’s policy announcement and here its view on what it is supposed to be targeting.

The CPI inflation rate spiked to 3.8 per cent for the year to the June quarter, largely reflecting the unwinding of some earlier COVID-19-related price declines. In underlying terms, inflation remains low, at around 1¾ per cent.

As you can see this is something of a classic of the genre where Australian consumers are told don’t worry you have to pay more for things because if you exclude the things which have risen the most then everything is fine. However if we look at the Australia Statistics numbers we see this.

The Consumer Price Index (CPI) rose 0.8% this quarter.

That is not unwinding price declines and it follows quarters where we had a 0.6% rise and then 0.9% before it. So they suggest there is an issue.

Australia Statistics also has a go but sadly they fail to explain either how they know something is a “one-off” and also how you can purchase things using their measures.

The Trimmed mean and Weighted median are measures of underlying inflation which exclude large, one-off price impacts. Trimmed mean annual inflation was 1.6% in the June quarter, which has increased from 1.1% in the March quarter.

House Prices

As even the Financial Times is on the case it was no surprise to see this in today’s RBA statement.

Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors.

In the past that would lead a central bank to raise interest-rates in response as we see prices and credit growth rising as well as investors entering the market who are presumably hoping for some easy pickings and profits. Let me mark that and look at the actual numbers.

Australian housing values increased a further 1.6% in July, according to CoreLogic’s national home value index.  The latest rise takes housing values 14.1% higher over the first seven months of the year and 16.1% higher over the past twelve months.

Yazz has clearly been on all the playlists for 2021.

The only way is up, baby
For you and me now
The only way is up, baby
For you and me now

If we step back for a moment we can recall that it was policy in Australia not so long ago to take some steam out of the market after a house price boom. Well now things have got a lot worse.

Mr Lawless attributes the lower rate of growth in housing values to several factors.  “With dwelling values rising more in a month than incomes are rising in a year, housing is moving out of reach for many members of the community.  Along with declining home affordability, much of the earlier COVID related fiscal support (particularly fiscal support related to housing) has expired.  ( Corelogic )

The next bit is really extraordinary stuff and the emphasis is mine.

CoreLogic’s research director, Tim Lawless, described the market as strong, but losing steam.  “The 16.1% lift in national housing values over the past year is the fastest pace of annual growth since February 2004, however the monthly growth rate has been trending lower since March this year when the national index rose 2.8%.”

So there has been a complete about turn in policy from let’s deal with the housing boom to lets pump up the balloon as fast as we can. The next step will be to emphasise it is slowing when it has to. After all if we switch to an Olympics metaphor even Usain Bolt slowed down eventually.

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However Australia Statistics has managed to record one of the biggest housing booms in history like this.

Prices for new dwellings fell 0.1% in the June 2021 quarter. Without the offset from the housing grants, the new dwellings series would have risen 1.9%, reflecting demand driven increases in materials and labour costs.

It is expected that these grants will continue to impact the measurement of new dwelling purchases over the next few quarters as applications are finalised and grants are paid.

If we switch to the numbers in the CPI series I note that in the middle of a price surge their housing category shows a 0.3% rise on the quarter and a 0.2% annual fall.

Looking Ahead

Whilst the RBA tries to downplay inflation dangers I note that the quote below has two of them in it.

Domestic financial conditions remain very accommodative, sovereign bond yields have declined and the exchange rate has depreciated to around its lowest level this year, despite elevated levels of commodity prices.

So the Aussie Dollar has fallen with the trade weighted index which was 65 in February now 61.8 and against the US Dollar it nearly made 0.8 back then and is now 0.74. That is curious when higher commodity prices are good for resources rich Australia and it will benefit from the price rises below.

Preliminary estimates for July indicate that the index increased by 5.5 per cent (on a monthly average basis) in SDR terms, after increasing by 6.0 per cent in June (revised). The rural, non-rural and base metals sub-indices all increased in the month. In Australian dollar terms, the index increased by 7.7 per cent in July.

In terms of inflation though these are yet more rises.


So far the story is relatively simple in that we have a central bank which has decided it knows better than its predecessors and will ignore both rising inflation and soaring house prices. The latter mostly because it created them with this.

maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent

maintain the target of 10 basis points for the April 2024 Australian Government bond

continue to purchase government securities at the rate of $5 billion a week until early September and then $4 billion a week until at least mid November.

Actually in terms of credit growth it copied the way the Bank of England pumped things up with the “Term Funding Facility”,

But we now also see this.

The recent outbreaks of the virus are, however, interrupting the recovery and GDP is expected to decline in the September quarter.

As that is the priority for central banks these days there ends any chance of a response to higher inflation especially if we note this.

Millions of people have been confined to their homes in China as the country tries to contain its largest coronavirus outbreak in months with mass testing and travel curbs. ( The Guardian)

If you are known as the South China Territories this is a cleat problem and of course Australia is seeing its own lockdowns. So by the time they get around to inflation we will be at stage 4 in my timeline “It’s too late now”


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