Why does Deflation Phil still have a job?

He pretty much only has one task. Keeping inflation in the 2-3% band. Yet he has failed utterly for four straight years. On headline inflation:

Trimmed mean:


Inflation expectations:


And wages:

Phil Lowe has managed to produce the worst period of falling living standards in modern Australian history and is, before our very eyes, embedding deflationary expectations.

The AFR’s John Kehoe has the rub:

Beware of deflation persisting.

Falling prices may be welcomed by consumers, but a risk from the COVID-19-induced recession is that deflation (falling prices) or disinflation (slower price rises) become entrenched.

…First, a fall in inflation is a defacto tightening of monetary policy. The real (inflation-adjusted) interest rate rises when inflation falls.

…Second, weaker inflation, particularly deflation, makes it harder for people, businesses and governments to pay off debts.

The federal government is forecast to lift gross debt towards $1 trillion and to its highest share of the economy since World War II.

The household debt-to-income ratio is almost 200 per cent, among the highest in the world.

…Deflation lowers people’s inflation expectations and causes lower wage demands – creating a downward spiral in wage and price pressures.

This is the RBA’s responsibility. Sure, it has gotten harder since it ran into the zero bound but it is not out of options. Nor can it can’t rely on fiscal. It has spent four years failing to change the mindset of an austerity-loving government. It’s most recent capitulation on any and all policy innovation isn’t a viable public policy choice. Nor is protecting mass immigration, which has been a key deflationary force.

The RBA can and should also:

  • smash the currency with QE for carry traders (along the lines proposed previously by Prof McKibbin);
  • break assumptions about the houses and holes economy to lower the currency;
  • campaign for MMT;
  • do MMT by itself;
  • use negative interest rates;
  • recombine with APRA to enable all kinds of inflationary activity that uses macroprudential to prevent it from expanding asset prices, its chief concern.

Deflation Phil has missed his key performance indicator spectacularly for four straight years. He is now the walking embodiment of quantitative failure.

Time to try someone new from outside the RBA’s deflationary swamp.

Houses and Holes
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