Chris Carolan, the editor of Elliott Wave International’s Asian-Pacific Short Term Update and European Short Term Update explains why Australia is in the news and why deflation and lower prices for the consumer may not be a good thing. Watch this new interview to learn why Chris believes the trend in Australia will continue towards outright deflation.

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[Editor’s note: A text version of the interview is below.]

Dana Weeks: Welcome to ElliottWaveTV. I’m Dana Weeks and today I’m meeting with Chris Carolan, editor of Elliott Wave International’s Asian-Pacific Short Term Update and European Short Term Update to talk about the growing disinflationary pressures in Australia. So Chris, let me start by asking you the obvious question — deflation means lower prices for the consumer, so what’s not to like?

Chris Carolan: One might think that, we all want to pay less for the things that we buy. But it’s more complicated than that. When people hold off on purchases, that affects companies profits get reduced, they then change their behavior, less investment in research, less investment in other productivity growth. And the spiral begins to take hold, the deflationary spiral. Which once it gets going, it’s very hard to break.

Dana: Let me stop you right there – we’ve heard for 20 years that deflation had Japan in its grasp – but what did that really mean to the Japanese? Have they suffered?

Chris: Well, I think it’s a bigger issue than just prices. Wage growth and social mood are large components of the deflationary spiral.  Japan, we’ve really seen a shift. Previous generations before the deflation set in were very positive, forward looking, economic growth. And then subsequent generation really had to backtrack because they don’t see their future improving. If you think of people starting families, buying houses, and they don’t think their wages are really going to improve in 10 or 20 years, that changes their economic behavior quite a bit. Japanese central bank has been trying to address this for many years and with many different policies and they’re consistently ineffective, they just can’t change people’s mood by throwing money at the problem.

Dana: So then why is Australia in the news?

Chris: They just posted a 1% inflation rate, this is the lowest rate in 17 years. This is showing a continued downward pressure on prices there. The RBA, the reserve bank of Australia, has been addressing this with easy money policies, but they’ve been unable to reverse that trend.

Dana: Can you give us a bit more history on this, Chris?

Chris: Well that’s a great question, let’s put a chart up on that, Dana. Inflation has been falling since 2014 specifically when it topped at 3% but disinflation has really been in play since 2008 when CPI topped at 5%.

Australia - CPI since 2000

As you can see on the chart, not only has disinflation been rampant for 6 years, the recent print below 1% took out the lows from 2009. You don’t have to be a chart detective to see that trend has further to go. It is still a good distance from outright deflation but it is on the way.

Dana: Is this just an Australia story?

Chris: No. We believe it is a growing global story. And when you talk about Australia, you have to talk a little bit about China as well. Let’s put up a chart of China inflation. As you can see, China has also been disinflating since 2010 specifically. And since Australia is the primary raw material supplier to China, it is therefore more vulnerable to the deflation China is exporting via the weakening yuan.

China - CPI since 2007

Dana: OK, so deflation is interconnected. What are you keeping an eye on going forward, just the ongoing CPI data for Australia?

Chris: Yes, CPI of course, but all the gauges for inflation are on the radar since so many of them are disinflating now.

Dana: Can you give us a few more examples?

Chris: Sure, wage growth — 2008 it was 4.30%. It has now been cut in half since then. It’s 2.1% now and still rising, but that’s fallen quite a bit like CPI. Another example, the GDP deflator, which the cost of goods domestically produced has rolled over as well. There are other gauges I could cite, but they all have the same message of increasing disinflation in Australia.

Dana: And you think this will continue towards outright deflation?

Chris: Exactly.

Dana: OK, we will be sure to check back with you on this Chris as it develops in the quarters ahead.

Chris: My pleasure anytime.

 

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