Addressing Congress in October 8, 1974, President Gerald Ford declared that inflation was "public enemy No 1", while exhorting his fellow Americans to reduce their spending and consumption so that high unemployment might fall. Some 40 years on from that notorious speech, the prevailing political and economic orthodoxy is that the greatest threat to the American economy is posed not by high inflation but by low to non-existent inflation. Nor, apparently, is there a clear way forward. Similar fears have been articulated about the economies of Europe, Japan and now Australia.
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What Mr Ford failed to see when he made his speech was that the impacts of sustained low or negative inflation can be just as debilitating as those of galloping inflation. Savers and retirees cannot earn a worthwhile return on their investments, and so shift riskier assets into their portfolios. Rising asset prices (particularly for housing) enrich some people but leave others locked out of the market – exacerbating economic and social inequality.
Pension and super fund returns dwindle, causing headaches for governments and superannuants. Deflation makes consumers reluctant to spend, slowing economic growth further, and the ease with which money can be borrowed by business and consumers frequently translates to poor or unproductive investment decisions.
The traditional method by which central banks counter laggardly economic growth is to lower official interest rates. But pulling these levers, at least since the Global Financial Crisis of 2008, has failed to deliver the expected results. Resort to quantitative easing – by which central banks pump billions of dollars into their respective economies – has miscarried too, leaving governments grappling with trillion-dollar deficits and central bankers perplexed as to just what stimulus measures will be effective.
Australia's economy has been largely immune to the GFC's buffeting winds, largely because the stimulus measures implemented here and in China were quick and decisive. However, many analysts and commentators believe Australia's immunity is wearing off and that low inflation, and possibly deflation, has taken hold.
It was this possibility that Philip Lowe addressed in his first speech as Reserve Bank governor on Tuesday. Dr Lowe did not disavow the theory that core inflation rates were low, and likely to remain that way for "a while yet". This he attributed to global low inflation, falls in commodity prices (including oil) and the shift in the perceived pricing power of many workers and business resulting from the globalisation of markets and technologies.
Globalisation can't be unwound, suggesting a return to the respectable wages growth of yore for Australian workers is unlikely. But Dr Lowe was not entirely pessimistic, citing excess capacity and a recent uptick in commodity prices as likely to provide some "pick-up in wage and prices" and a lessening of downward inflation pressure.
The RBA still has the "flexibility" to keep inflation to its target of between two and three per cent, Dr Lowe reassured his audience. His room for manoeuvre, however, may be shrinking.
