I think there are two factors behind low inflation results. The first is the ongoing conservatism post GFC. This will pass in time. The second is “disruption” – the ability of consumers to buy whenever and wherever they want. In the current environment, businesses are more likely to look for ways to cut costs than put up prices. I think in hindsight, we will measure the low inflation period in years rather than decades. But it all depends on technological change and the extent to which more innovations are uncovered allowing businesses to lower prices and compete. The only tool at the Reserve Bank’s disposal to combat low inflation is reducing interest rates. But while the RBA can still cut rates further, it may need to be accompanied by tighter prudential or lending policy by financial regulators – the “third wheel” or economic policy.
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