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With the Australian economy with a Goldilocks zone, too much or too little inflation is bad for business. But the latest figures show that the Australian economy is weakening, with inflation reaching its lowest rate in 50 years, according to Commsec Chief Economist Ryan Felsman.
He added that wages "limited inflation", while persistent underemployment and population growth kept pressure on the labor market.
The problem with inflation in the doldrums is that it shows that the economy – despite one of the lowest unemployment rates in recent years – is not recovering. Inflation acts like fat in the machinery of the machine. Too much or too little is bad. What Australia needs is the Goldilocks zone, which is between 2% and 3%, in which the Reserve Bank of Australia sets its inflation range.
The higher the rate of inflation, the sooner things lose value, which means that borrowers have the double benefit of repaying a mortgage, the value of which declines as their wages rise. The counterpoint to this is that, in times of low inflation, wages are not rising fast enough and inflation is not fast enough to allow people to get ahead.
THE GOOD NEWS
Ryan Felsman said that there were benefits, with low price increases minimizing the impact of the price of gasoline and electricity on the family's bottom line.
The inflation rate is as low as there are many reasons. According to the statement issued by the Australian Bureau of Statistics on Wednesday, there is a sharp drop in childcare costs (down 11.8%), motor vehicle prices ( down 1.8%) and telecommunications equipment and services (down 1.5%). The cost of food, clothing, rent (+ 0.6%), household goods and services, communications and electronics remained broadly stable.
But according to Shane Oliver, Chief Economist at AMP Capital, everything comes down to the most important thing: wages. Wages are giving companies the opportunity to raise prices and allow Australians to buy more, pay off their debts and inflate the value of their mortgages. Without inflation, the fat is missing from the machine.
"Inflation feeds on itself and continues on its own," Oliver told news.com.au.
"The longer we spend below the target, the greater the risk."
Nothing will come to inflate inflation
Mr Oliver said that Australians should expect a rise in interest rates at least until the end of 2020, warning that there was nothing to the horizon that could propel inflation upward.
"It looks like we are rolling and fingers crossed, something is happening," he said.
This chief economist, Callam Pickering, told news.com.au that persistent underemployment across the entire Australian economy was limiting wages.
"There is a lot of capacity available in the economy and this is reflected in inflation," he said.
"Although the unemployment rate has dropped to 5%, broader measures of slackening the labor market remain high and point to a long period of disappointing wage growth."
But the longer the low inflation lasts, the longer it will take before the Reserve Bank raises interest rates. Many experts say that it removes an essential weapon to fight against any future financial crisis.
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