Daily BulletinDaily Bulletin

The Conversation

  • Written by The Conversation Contributor

Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data impacting global economies.

This week: Australian inflation shocks, making for higher expectations of a budget day rate cut.

Markets were shocked this week by Australia’s March quarter Consumer Price Index. Headline inflation was negative (-0.2%), bringing the annual rate down to just 1.3%. Core inflation – which strips out the most volatile components – rose by just 0.15% compared to market expectations of 0.5%, and put the annual rate at 1.55%. This is now materially below the RBA’s 2-3% inflation target.

Markets reacted by putting the odds of a budget day RBA rate cut up to more than 50% from the roughly one-in-eight chance prior to the CPI announcement.

It’s too soon to freak out about Japanese-European-style deflation gripping Australia. But it is a worrying sign.

It will also affect the federal budget on May 3. Inflation has a positive and negative impact because it hits the expenditure side through, for instance, welfare benefits, but it also hits tax receipts. Watch out on budget day for how creative Treasury assumptions are about this balance.

Meanwhile, the US Federal Reserve kept the target range for its overnight lending rate at 0.25-0.5%, as expected. They still seem to anticipate a series of rate rises over the coming quarters, citing continued positive labour-market news: “A range of recent indicators, including strong job gains, points to additional strengthening of the labor market.”

Yet with inflation below the bottom of the Fed’s 2% target range, and growth still worryingly low, it is possible something could go wrong with the gradual “rise back to normality” story.

Like Australia, a lot of weight is getting put on positive labour-market news. That’s fine, if it’s right and sustainable. I have been expressing concern about the former, and still retain some scepticism.

So much has changed in the global economy since 2008, and so much economic capacity lies idle, that one should be very cautious about applying old rules of thumb and reading statistics the same old way. It’s hard, and it’s the best we can do, but we should not be surprised if labour markets turn out to be weaker than we thought.

And with wage growth sluggish at best, and indications of underemployment problems in Australia and the US, maybe the labour market isn’t doing so well after all. Stay tuned. And a little afraid.

Finally, Victorian treasurer Tim Pallas handed down the state budget this week. There were a handful of cynical tax hikes: increasing stamp duty for foreign buyers from 3% to 7% and slugging so-called “absentee landlords” with a land tax surcharge of 1.5%, up from 0.5%. But it did deliver a nearly A$3 billion projected surplus for 2016-17. Large-scale infrastructure spending received a boost: notably the A$5.6 billion West Connect and the A$11 billion Metro Rail project. So too did wages for many state-government employees.

So, tax foreigners and real estate “speculators” to build roads and pay emergency services employees more. Sounds like an election budget. But to his credit, Pallas did balance the books under what looks a reasonable (if not super conservative) set of macroeconomic assumptions. And it looks like Victoria’s triple-A credit rating is safe.

If only Scott Morrison could make such a boast.

Authors: The Conversation Contributor

Read more http://theconversation.com/vital-signs-deflation-down-under-58494

Why the coronavirus shouldn't stand in the way of the next wage increase


Seeing is believing: how media mythbusting can actually make false beliefs stronger


Scott Morrison's address to the National Press Club


The Conversation


$1.8 billion boost for local government

The Federal Liberal and Nationals Government will deliver a $1.8 billion boost for road and community projects through local governments across Australia.   The package of support will help lo...

Scott Morrison - avatar Scott Morrison

Scott Morrison press conference

PRIME MINISTER: This is a tough day for Australia, a very tough day. Almost 600,000 jobs have been lost, every one of them devastating for those Australians, for their families, for their commun...

Scott Morrison - avatar Scott Morrison


Local economic recovery plans will help towns and regions hit by bushfires get back on their feet as part of a new $650 million package of support from the Morrison Government.   As part of th...

Scott Morrison - avatar Scott Morrison

Business News

How have live chatbots turned beneficial for online businesses?

Every business these days have come up with their online models. While some people still rely on the customer service representatives to handle the queries for their company around the clock through...

Paresh Patil - avatar Paresh Patil

Which Internet Marketing techniques can boost my business?

Internet marketing can be easily defined as various internet techniques that can be used to promote a product or service to all those people who use the internet to visit various websites and social p...

Kamballa Johnson - avatar Kamballa Johnson

3 Top Tips to Hiring Long Distance Movers

Moving doesn’t need to be stressful at all. Find the right moving company to help with your relocation and the whole experience should be what you want out of the move in the first place – a new sta...

Ash Thomson - avatar Ash Thomson

News Company Media Core

Content & Technology Connecting Global Audiences

More Information - Less Opinion