The Chief Economist for the ABS, Bruce Hockman noted that the CPI dropped by 1.9 percent, which ABS data indicates is the “largest quarterly fall in the 72-year history of the CPI.”
“Since 1949, this was only the third time annual inflation has been negative,” Hockman said.
“The previous times were in 1962 and 1997-98,” he noted.
“Inflation traditionally shows a level of activity in the economy, a leader of positive, in acceptable bounds, of positive tension in the economy,” he told reporters.
ChildCare and Fuel A Major Driver of CPI Drop
The largest contributor to the CPI drop in this financial quarter has been the absence of child care costs with cost plunging by 95 percent as the service was offered for free from April 6 as part of the government’s pandemic response.The other two significant draggers were automotive fuel, which fell by 19.3 per cent due to the limited demand from lockdown restriction, and free preschool and primary education (fell 16.2 per cent) in NSW, Victoria and Queensland.
“Excluding these three components, the CPI would have risen 0.1 per cent in the June quarter,” Hockman said.
But the ABS did note that the prices for household essentials like cleaning and maintenance products rose by 6.2 percent and non-durable household products, which include toilet paper went up by 4.5 percent.
While the general decrease in prices is a good thing as it gives consumers greater purchasing power, deflation typically reflects economic depression that associates with a dramatic rise in unemployment, or a sharp slump in incomes and aggregate demand.
An extended deflation is seen by economists a threat to economic growth as it discourages consumer spending and business investment, thus stifling further employment opportunities.
Earlier this year, the Reserve Bank of Australia has hinted inflation would turn negative in June due to market and policy response to the pandemic.
RBA’s inflation target range is two percent to three per cent.
JPMorgan economist Tom Kennedy said a rebound in inflation is likely in the third quarter, with the childcare-subsidy scheme having ended on July 12.
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