Wednesday, 27 April 2016

What does the CPI tells us?

The March CPI was released yesterday.It fell which is very unusual. We had deflation not inflation.
Deflation is usually occurs for one of two reasons.
1) Innovation makes lots of goods and services cheaper and you have strong economic growth.
2) The economy is weak and so is demand for goods and services.

most people would think 2) is more appropriate now than 1). however it would be at odds with the labour market for example. Thus policy makers are in a dilemma.
Some indicators show the economy needs to be jump started whilst others show the opposite. The RBA will be in a quandary next Tuesday.

Steve from Brisbane again remembers Sinclair Davidson infamous prediction of stagflation occurring in Australia..

I would make two observations on this. Davidson's informal model   when making this prediction was hopeless even allowing for the fact most people have stagflation being inflation and unemployment being if not then very close to double digits. We were not within cooee of that.

Davidson had no idea of how stagflation occurred in the 1970s. At that time we had a large supply side shock ( very high oil prices) and a highly regulated labour market. Neither of those two circumstances were in evidence when Davidson made his ludicrous prediction.
If only he was a economist!