The Reserve Bank of Australia has let inflation slide.
Headline consumer price inflation has been below 2% since 2014, i.e. for seven consecutive quarters. That represents the longest period inflation has spent outside the 2 to 3% target band since the late 1990s.
The RBA’s preferred inflation measures -- which normally stick even closer to the target band -- are now both also below 2%, while headline inflation has just crashed to a fresh low of just 1%.
In that time the bank has moved its cash rate target three times, cutting it from 2.5% to 1.75%. Room to move remains. Why would it not do more to prevent this apparent failure?
Low inflation is a potentially huge problem. Deflation is famous for being a wet blanket on economic activity -- if money might be worth more in future, why spend it now?
A paper presented by RBA economist at a 2015 conference suggests the RBA feels it is sitting pretty.
Written by the RBA’s Christian Gillitzer and John Simon, the paper comes with the standard caveats that the views in it belong to the authors. But its contents are extremely useful in interpreting the actions of the Australian government’s monetary policy arm.
It suggests the bank no longer worries about much about affecting inflationary expectations.
“Now that inflation credibility has been established, there is greater scope than in the early years of inflation targeting to tolerate meaningful deviations from target: consumers and firms are less likely to interpret deviations from target as revisions to the implicit inflation target than when inflation targeting was in its infancy.”
The data bear that view out. Shocks to inflation don’t change expectations much.
Source: Inflation Targeting: A Victim of Its Own Success? (Gillitzer, C, et al 2015)