OPINION: The main reason is that the RBA won’t let it happen. It knows how to avoid it, and it will do whatever it takes to keep inflation expectations under control.
And it is certainly not impossible that Australia will experience the first “business cycle”- type recession in three decades , combined with some period of higher-than-standard inflation.
Two future Nobel laureates, Milton Friedman and Edmund Phelps, argued persuasively in the late 1960s that this relationship was, in fact, not stable. They pointed out that the Phillips Curve would break down if people expected inflation to increase.If people expect higher inflation, they will try to raise prices or demand higher wages. In fact, they will try to do that to protect their real purchasing power.
And if there’s one chart that demonstrates the success of that approach, it’s this one. In fact, during the 10-year term of Glenn Stevens as governor, inflation averaged 2.5 per cent a year – dead on the midpoint of the target range. It used to be that central banks were almost comically vague about what they meant. It even had a name: Fedspeak. Alan Greenspan was a master of this dark art, once telling Congress: “If I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”
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