Reflation: Impact on Australia's economy and things to know

By @mik_mapa on
Screens At The Australian Stock Exchange In Central Sydney Display Market Information
A man looks at screens displaying market information as he walks past the Australian Stock Exchange in central Sydney July 4, 2013. Reuters/David Gray

The International Monetary Fund (IMF) has noted that the global economy has recovered in investment, manufacturing and trade. It also revealed that Australia showed an increased growth in its economy as it entered reflation. According to the Consumer Price Index (CPI), inflation rose by 0.5 percent in the December quarter 2016 while it rose 2.1 percent through the year to March quarter 2017.

What is reflation?

Reflation means the recovery of the price level when it has fallen below the trend line. It simply means the end of below trend growth. It is a period where higher prices and stronger growth takes place at the same time. It is the opposite of deflationary meaning falling prices and disinflationary meaning prices rising at a slow rate.

It is beneficial to a country's economy because when demand grows, firms expands production that leads to requiring more staff. Job seekers benefit as well but higher wages is expected. The federal government could benefit from reflation through increased tax revenue. It could be possible because corporate profits increase and the number of employees increases as they return to the workforce.

Another definition of reflation is the intentional acceleration of economic activity of the government to reverse deflationary trends. The government usually used the public spending or inflationary measures to achieve it. In the current status of the global economy, the reflation is achieved because the central bankers slashed interest rates to all time lows. They have greatly expanded their balance sheets by purchasing assets.

The move of the U.S. Government to deregulate industries causes reflation. It did not only affect the country but the economic growth has affected elsewhere including Australia that sold raw materials and goods in the U.S. The end of U.S. Presidential election and political uncertainty of the Brexit referendum has also contributed in the boost of the economy. The White House has also promised increasing infrastructure spending in its country.

Better global economy

There is no guarantee that reflation could keep going as the U.S. Federal Reserve has indicated discomfort with high share prices. Selling some of the federal reserves assets or increasing rates were other factors that could impact demand. Trump administration's ability to enact legislation was already in question and his reversed course on engagement in the middle east and North Korea were new sources of political uncertainty. Such uncertainties could inhibit the firms to make investments and to make employment decisions. Currently, the economic signs were good for continued reflation but it would be fragile if geopolitical tensions increases and the recovery would be thrown off course by policymakers.

Have we reached peak reflation trade? 

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