Has deflation arrived on out doorstep?

Everyone is wondering – and worrying – about what impact those falling inflation figures are going to have on the economy.

For the record the new RBA’s forecast is for underlying inflation to fall by 1 per cent to a new range of just 1-2 per cent through December 2016. And inflation out to June 2018 is now expected to hold between 1.5-2.5 per cent – well below trend.

All market watchers will be looking to the next quarter’s CPI figures to see if the RBA had it right to go early with a interest rate cut.

Of course most see deflation as a friend to the consumer – as things get cheape – but what happens in reality is people stop spending hoping to pay cheaper prices tomorrow. The RBA cuts interest rates to try and stimulate the economy, but rates are already low. Savers get it in the neck because their returns fall too. The currency falls to compensate and this lifts the cost of imported goods and oversea travel but hopefully lifts export returns.

There are also unexpected consequences: when yields fall then asset prices fall with them. Those landlords with CPI-indexed variations built into their rent rolls could be losing some sleep because if rents fall then the asset has to be revalued . . . downwards ie commercial and retail property for example.

Most respected economist are pushing the government for bigger spending on infrastructure, which stimulates industry – and wages – and eventually lifts productivity. They think the RBA is running out of firepower on those low rates.

 DON’T WORRY YOU CAN ALWAYS BUY A NEW CAR

One consumerable that’s been getting relatively cheaper for a long time is cars and we’re buying more of them.

But nowadays they are more likely to be Sports Utility Vehicles (SUVs) , with over 45 per cent of passenger cars sales being in the pretend all-wheel drive category.

According to the Federal Chamber of Automotive Industries (FCAI), total new vehicles sales were 87,571 in April, up 7.2 per cent over the year. SUVs accounted for a record 36.2 per cent of all passenger vehicles in the 12 months to April.

Makes you wonder why there are so many June 30 runout sales going on. Maybe things are slowing down, or dealers just want to move metal before the Federal election.

BUT SOON WE WILL BE TOO OLD TO DRIVE

Here’s some fascinating numbers crunched by the economics crew down at CommSec that show how much Australia is changing.

According to the Bureau of Statistics’ (ABS) detailed labour force figures for demographic groups there are more people over the age of 65 in the “civilian population” than in the key “working” demographic of between 25-34 years.

But fear not because “One in eight people over the age of 65 are working or looking for work.”

\While the participation rate in the workforce is steady at fairly high levels, and seniors are playing a greater role, the participation rate for the 15-19 years grouping is trending lower reflecting the fact that they are studying longer before joining the workforce.

So in broad terms the good news is that while there are more older people in Australia they are choosing to stay in the workforce longer, the middle ground is still growing albeit at a slower rate, while younger workers are becoming more skilled.

For the government stretched on the welfare side, it means that the demographic time bomb may have been put back to a later date.

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