inflation deflation

Why Do Governments Fear Stable Prices?

If you listen to the majority of mainstream economists, you may believe that deflation could herald in the end of the world as we know it.

Deflation is a scenario where the dollar in your pocket is worth, say, 2% more next year rather than 2% less.

The truth is that in a deflationary world, we just need to adjust our mindset. With 2% deflation you may be happy not receiving a pay rise, as your current salary would buy you 2% more over the coming year.

Hyper-deflation, where cash might double in value over a year, is a different story. That would see people hoard cash and cut back on discretionary spending. But this has never yet happened in the history of the world. And it’s unlikely it ever will.

The only big losers in a modest deflationary setting are those in debt. That’s because the value of that debt would go up every year…rather than down if there’s inflation.

With governments around the world in debt up to their eyeballs, is it any wonder their experts all call for inflation in the 3% range? That, after all, will see the real cost of their debt cut in half every 24 years without them having to do anything.

While Australia isn’t enjoying modest deflation yet, there are early signs businesses may be transitioning for that to happen. But, not surprisingly, they’re expressing concern about the transition.

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Companies forced to discount products

A service industry survey proposes that a number of businesses locked in their discounts in April due to consumers becoming cautious and turning frugal.

On Friday, the Ai Group’s Performance of Services Index (PSI) was released, and logged a fourth month in a row of tightening in the Australian services sector, AAP reports.

The number of services businesses able to increase prices has fallen in recent months as competition from overseas sellers has increased, wages growth has slowed and consumer discretionary spending has tightened,’ the Ai Group report said.

With replies from roughly 200 businesses, the PSI noted a fastening in the fall of selling prices in April, to a record low.

This latest fall in the selling price index has been sharper and faster than the period of growth seen in 2018; it may have wiped out any pricing gains realised in that time,’ the report said.

Sales, new orders and employment were all lower in April and many businesses discounted prices in tough market conditions,’ Ai Group chief executive Innes Willox said.

Hospitality only sector up

For retail, the sector’s trade activity tightened for the fifth straight month, in turn it was its weakest result since June 2012, according to the index. Selling prices in the sub-sector continues to be steady after falling in March.

The transport and storage segment were also recorded by the index as having had activity contraction, it noted that ‘some respondents reported slow inquiries and new orders while others said they needed to continue price discounting in order to sustain their sales levels in April’.

Only one services sector saw an increase in activity for April and that was hospitality. Mr Willox noted that this was due to a high number of holiday’s in April; the Easter Break and Anzac Day.

The PSI results reinforced the ABS consumer price index figures published last week that showed 0% for the March quarter.

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Alana Sumic

Alana Sumic

Alana Sumic is an editor and writer for The Australian Tribune. She has a Bachelor of Arts from La Trobe University and a Masters in Publishing and Editing from Monash University.

She specialises in national and international politics and current affairs. She’s passionate about delivering the unfiltered stories that matter to you, on all topics.

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