Australia’s Dilemma: Consumer Price Index on Historic Low

In the middle of the COVID-19 recession, Australia suffers another painful blow. The Consumer Price Index fell by 1.9% in the June 2020 quarter. The country recorded a negative inflation rate of 0.3%, last seen during the Asian Financial Crisis of 1997-1998.

The fall is primarily due to the Morrison administration’s decision for free childcare. The government subsidized 95% of childcare costs, starting last April and ending on July 12. Analysts noted that if it weren’t for the dramatic reduction in the cost, the CPI would have risen to 0.1%. Similarly, three Australian states, namely New South Wales, Victoria, and Queensland, offered free preschool.

Petrol price also experienced a sharp drop of 19% as fuel prices in the international market are still tumbling into the red. In housing and real estate, rents fell to 1.3%, back to its 2017 level. Luckily, citizens are protected by a moratorium on rent eviction until September.

Deflation and Its Economic Impact

On the other hand, the price for pandemic essentials rose, especially during the start of lockdowns. Cleaning and maintenance products rose by 6.2%. The most hoarded item, toilet paper, received the most significant price hike. Food items, particularly those with long shelf lives such as canned goods, also experienced high added cost. Surprisingly, the price of some perishables, such as beef and vegetables, fell.

Deflation is a measure of cash flow. If there is little money circulating in the economy, the value of the currency rises, and the cost of goods falls. When this happens, consumers will likely delay spending, thinking that prices may drop significantly in the coming days. Less consumer spending translates to less profit for businesses, eventually leading to the need to cut operations and more job losses.

An extended period of deflation poses an economic threat. It signals recession, which is what is currently experienced in Australia. This may lead to depression if the current situation persists.