Negative inflation does it matter? Yes!

• The June 2020 CPI index has been released. 

• The Consumer Price Index (CPI) number for the June 2020 quarter is 114.4 (down from 116.6 for the March 2020 quarter). This represents a decrease (or negative inflation/deflation) of 1.9%

• As at June 2019, the CPI number was 114.8 – so the annual decrease is 0.3%.

A negative CPI is unusual – having only been recorded twice in the modern post war series.  

As well as indicating the “health” of the economy, practically the CPI index provides for “time value of money” adjustments for a variety of commercial and legislative instruments.

As many such instruments do not contemplate the CPI being negative, this could have flow on economic impacts.

In our view, subject to the ongoing shock of the pandemic, we would expect to see the CPI return to between 1.5% to 2.0% per annum, as the June result was particularly influenced by the impact of reduced (to nil) child care costs and transport costs due to lower fuel prices.  We would expect to see these costs return to “normal” given the removal of the child care subsidies and demand returning post Covid.  

In this case, we do not see the CPI movement being the start of a deflationary cycle – where falling prices result in reduced production, wages, and more price declines – given that many elements of the CPI calculation are still showing moderate price growth.  However, overall confidence in the economy remains weak – so we would be concerned about the short and longer term impact should the “second wave” of Covid-19 be prolonged.

At least this all goes well for those enjoying the low interest rate environment, as it is difficult to see the RBA looking to move on these whilst inflation remains below its target range of 2-3%