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Inflation and Deflation
In 2009, there was a lot of debate on whether or inflation or deflation was what we needed to worry about in future. I wrote some of my thoughts about it in a few blog posts starting with Inflation or Deflation in September 2009. Today, 18 months later, the answer to the question seems to be “Yes” as we are experiencing both inflation and deflation at the same time.
In Australia, if we look at the CPI numbers from the RBA website, inflation seems to be falling. The year ended percentage change for December 2008 was 4.2%, December 2009 was 3.2% and December 2010 was 2.2%. When the CPI numbers were announced recently, there was a big uproar. In a poll done by the Age, 81% or the respondents felt the cost of living seems to have gone up a lot more the CPI rate. When the Bureau of Statistics released the cost of living numbers a week later, it showed that for working households like ours, the cost of living increased by 4.5%, which is over 60% higher than CPI. For self-funded retirees, the cost of living only increased by 2.6% which is below the CPI for the equivalent period. The bureau admits that CPI is a poor guide to living costs and I have to agree with them on that one. 2008 was a good year for the working family as mortgage rates were slashed and the government gave everyone free money. We were definitely more comfortable financially in 2008 compared to 2010 even though CPI was lower in 2010.
On the global level, we also get a mixed picture if we look at CPI numbers with Japan clearly having deflation; developed countries have very low inflation; and developing countries having very high inflation. A comparison of CPI numbers may not be an apple to apple comparison as the calculation of CPI varies between countries and governments sometimes change it to get the number they want. In China where food prices have been skyrocketing, the government conveniently changed the weighting of food prices in their CPI calculations to get a lower CPI number.
In my discussions in 2009 on inflation, I also mentioned that there were two different types of inflation – “price inflation” and “asset inflation”. CPI is a measure of price inflation but there is no common measure for asset inflation. In Australia, the share market index went sideways so I would guess that the value of most of our share portfolios did not experience much inflation in 2010. Property prices definitely went up in 2010. Our currency exchange rate also went up so in a way, the value of our cash assets have also increased (only when you shop overseas). This also means deflation in the price of imported items like cars, TVs, computers, clothing etc. Some things have become so cheap at Kmart that their ad says you can bring your pre-schooler there to learn to count because most items are priced in small single digit numbers!
Most developed countries continue to experience deflation in property prices while the opposite is happening in developing countries like China. There is clearly a strong correlation between property prices and ease of obtaining credit. We attended a property seminar recently and the presenter, a mortgage broker, pointed out that the LVR has fallen to 60% in some of the popular inner city suburbs in Melbourne. This means that the maximum amount a bank is willing to lend for a property is only 60% of the property value in these areas. Due to the new rules in the National Consumer Credit Protection Act, effective 1st January 2011, borrowers over the age of 50 cannot obtain a home loan (not investment property loan) if they can’t pay off the entire home mortgage before retirement without selling their home. This means that the number of people who will be able to obtain sufficient credit to buy in these suburbs will be reduced. Perhaps the bankers can already see the writing on the wall and are preparing for a possible fall of up to 40% in these areas?
So what can we do to protect ourselves from inflation and/or deflation? After much deliberation, we have made a decision to cash in the profits from an investment property that has performed well to pay off the home mortgage. Whether property prices continue to rise or fall, we will still have a place to live that we like. If the banks continue to increase their lending rates, we do not have to worry about its impact on our standard of living. We are aware we may miss out on further capital gains in our investment property and have to pay capital gains tax (ouch) but we are prepared to accept that in exchange for less stress from having to worry about inflation or deflation.
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I have been waiting for some years to see some indication of intelligence and integrity from the both parties, but it has been in vain. All I can see is stupidity and possibility corruption. The consistent insistence of Wayne Swan and the team to continue with this low top personal tax and low corporate tax has been destroying the economy for the last forty or so years, and was shown by the dive into the “recession we had to have” with Paul Keating about 1985. It has been followed by recessions by John Howard and Peter Costello in the ’90′s etc, and by Wayne Swan several times since his term as treasurer. Both the parties – Liberal and Labor have been quick to claim “Global economy” for their incompetence, inability to even recognise what and where the problem is, even though Wayne has been told several times. The Global warming issue, is another instance where even if it is actual, I cannot see where the tax intended to be applied, is going to affect any improvement at all, maybe one of your “intelligent” gang can advise me and the rest of Australia. Admittedly, the Liberal party seems to be equally ignorant of the necessities to return Australia to an economical success. We can no longer live in this hopeless tangle of stupidity, and have to look forward for a party with intelligence and integrity, and allegiance to Australia and our people. The obsession of both parties in the export of our non-renewable, non-value added resources with the reciprocal imports of all the goods we used to manufacture in Australia, clothing, tools, cars, even trains, shows that these incompetents are wholly determined in destroying the economy and whatever else still exists in our country. As you might get from this message, I and most likely many more will not be voting any more for either the Labor or the Liberal parties in future elections. I have to wonder how a gang of so called professionals can be so stupid or is it corrupt, maybe it is something they are eating or drinking, but they had better get off it quick, it might be fatal the way it is affecting them. The obvious moron remarks that both parties have in their fanatics, shows there is not much hope in either.