Courtesy of Mish.
The Reserve Bank of Australia is so concerned about deflation that it did a study on why prices are so low despite a 33% collapse in the Australian dollar vs. the US dollar since June 2011.
The RBA blamed competition and discounters like Aldi.
Australian Dollar vs. US Dollar
Worrying Trend
Lower prices are precisely what consumers want and need. Nonetheless, this headline from “down under” reflects prevailing silliness: Lower Prices are Just the Beginning … of a Worrying Trend by economist Jason Murphy.
RETAIL prices have stayed low for a long time. So suspiciously low that the Reserve Bank of Australia (RBA) started to wonder if something had gone wrong.
It did a big investigation which it published last week. The reason they found? Mostly Aldi.
The RBA says we’ve had “a large downward shift in the average rate of retail inflation” that is not explained by labour costs or import costs. It blames technology (the internet) but also competition spurred by new foreign retailers.
Coles has cut its prices by 1.4 percent this year even though market observers have warned an all-out price war would be bad for Coles, Woolworths and IGA.
The low level of retail inflation has been a major puzzle for the boffins at the Reserve Bank. They aim to keep inflation between 2 per cent and 3 per cent a year. But retail inflation has been below that.
Retailers have not been passing on the effect of the lower Aussie dollar.
When the Australian dollar started falling, back in 2012, everyone expected retail prices would start rising. A lower Aussie dollar makes imported goods more expensive, so it makes sense we’d see higher prices on the shelves. We waited and waited. But it never really happened.
So what’s happened? The RBA reports technology and foreign retailers have contributed to a climate of fear for Australian retailers. They are deeply worried about what will happen if they raise prices.
Retailers don’t want to cut their margins too much, so they have been working very hard to remove the other costs of doing business.
That’s the Aldi specialty — they cut costs every way they can, like stacking things in the same pallets they arrived in and speeding up check out by not packing bags. Other supermarkets have been trying to achieve similar cost reductions with things like automated check-outs.
But all this can only go on for so long. The Aldi effect can’t cause low inflation forever.
Price rises can be constrained for a while but eventually retailers are running at international best practice — on the absolute bare bones — and then the changes in the basic price of goods should be revealed again. Retail inflation could snap back to normal.
That will be good news at the Reserve Bank — they get sleeplessness nights thinking about inflation. But for shoppers these happy days of prices going down down will be over — at Coles, at Woolies, and yes, even at Aldi.
Why are Retail Prices So Low?
Let’s now take a look at the RBA study Why are Retail Prices So Low?
