The inflation, or more correctly, deflation, figure published yesterday is generally good economic news for Australia, but there is no room for complacency. It is the second successive deflation figure in the annual consumer price index measure of inflation, but on a quarter-by-quarter basis the CPI rose 0.3 per cent.
Even though this means an annual rise of 1.4 per cent which is well below the Reserve Bank’s target of between 2 and 3 per cent, the trend is slightly up. Inflation can spiral quite quickly once expectations of price rises build up and people seek pay rises to match them.
Further, yesterday’s figure is somewhat of a false one. Much of the deflation is a result of decreases in mortgage payments following interest rate cuts. It means to the cost of other things are rising commensurately higher, notably hospital and medical services, furniture and fuel prices and private rents. People seeing these price rises will not be convinced that inflation is under control and will seek pay rises to compensate.
It is important that pay rises be restricted to productivity rises. And in this environment it is important that executives take a lead by not awarding themselves large pay rises without productivity increases.
People renting rather than buying their homes will rightly see some injustice in having to shoulder a disproportionate part of any wage discipline applied as a result of the low inflation figure. However, high inflation carries worse injustice as savings are eroded and people with inflating assets can take greater advantage of negative gearing and other tax avoidance methods. And this is aside from the poorer economic performance that comes with inflation and reduces living standards generally.