Shock inflation result as consumer prices fall 0.2%

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CPI figures have fallen for the first time since the GFC, driven by a 10% decline in fuel prices and 11.1% decline in fruit prices, in the first quarter of 2016. Headline inflation fell by 0.2% from the December quarter against economists’ expectations of 0.3%. Headline inflation was 1.3% year on year in comparison to 1.7% last year. Core inflation, on the other hand rose between 0.1% - 0.2% in the quarter and between 1.4% - 1.7% year on year. Soft inflation figures provide greater reason for the Reserve Bank to reduce the cash rate although some economists believe that there is no pressing need to cut rates anytime soon. However, on release of these figure, the chance of a rate cut this year rose to 48% from 12%.

How does this relate to the HSC syllabus?

  • Falling consumer prices, as observed with the fall of headline inflation by 0.2% represents deflation (HSC Topic 3 – Economic Issues). This reduction in inflation was brought on mostly by low oil prices. Since oil is used in the production of most goods and services, including the provision of fuel, businesses have passed these reductions to consumers causing the price of goods and services to fall. Given that inflation measures the change in price levels over time, the decrease in the price of goods and services have caused deflation.
    • Deflation can be argued to be a greater concern for the economy than inflation (see Economics Update 31 January 2016. In addition to the issues caused by deflation on the economy, economic policies have been observed to be more effective in reducing inflation rather than stimulating inflation.
  • The more significant statistic to look at is core inflation (or underlying inflation) since core inflation removes the effect of items which experience volatile price changes such as fuel. As such, the effect of changes in oil prices will be removed from CPI. Core inflation rose by 0.1-0.2% and between 1.4-1.7% year on year. From these figures, inflation is increasing. However, inflation of 1.4-1.7% remains under the Reserve Bank target range of 2-3%.
  • Given that inflation falls outside the RBA’s target range, the market predicts an increased chance (48%) of the RBA cutting the cash rate to stimulate the economy. The chances of a rate cut is reduced, however, by the fact that the labour market is experiencing signs of strength as the unemployment rate fell to 5.8% last month. The next RBA meeting will be on Tuesday 3rd May, hours before the federal budget is released.

Blockbuster Asian trade deal embraces China, rivals US-led TPP

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The Regional Comprehensive Economic Partnership (RCEP) has been proposed among 16 Asian countries and is expected to include Australia, China, Japan, Korea, India, New Zealand and ten member states of ASEAN. The RCEP is expected to rival the Trans-Pacific Partnership (TPP) which includes America and Japan (see Economics Update 7 February 2016). Trade experts say that eventually, the rival trade deals will come together in a consolidated APEC wide agreement which could become the world’s largest trade agreement.

How does this relate to the HSC syllabus?

  • The establishment of a new free trade agreement is expected to benefit industries such as agriculture and education the most. Trade agreements tend to remove trade barriers between economies such as tariffs and quotas (HSC Topic 1 – The Global Economy). As such, Australia’s agricultural goods will be more competitive to the intended partners of the trade agreement which will increase the demand for these goods and therefore provide a boost to the industry.
  • There are concerns about the ‘diversity of partners’ from Cambodia, Myanmar and Australia which present a challenge to the conclusion of the agreement. Given that the RCEP is a multilateral trade agreement, it will be more difficult to conclude as different economies will have different agendas and concerns they want to address (HSC Topic 1 – The Global Economy).
  • The concern about the TPP highlights the criticism of trade agreements. Rather than promoting globalisation, the agreement is argued to promote regionalisation as economies who are not part of the agreement are excluded and sometimes favourable policies are imposed upon them (HSC Topic 1 – The Global Economy).

Murray Goulburn price cut to be felt across the agricultural sector

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Murray Goulburn decreased the milk prices it planned to pay to farmers from a promised $5.60 to $5.47 a kilogram for the rest of the financial year, constituting the first mid-season cut since the GFC. There are concerns that this price cut can affect farmers who don’t supply to Murray Goulburn. Although Murray Goulburn’s competitors including Bega, Warrnambool and Fonterra have not yet renegotiated prices with their farmers, price cuts with their farmers can be expected as they try to remain competitive to consumers. Falling prices for farmers will see approximately 10-15% of farmers leave the industry as they balance concurrent issues with lack of rain and high water prices.

How does this relate to the HSC syllabus?

  • The decrease in the milk prices Murray Goulburn pays to its farmers will decrease its costs and, ceteris paribus, increases its profits to fulfil one of its goals as a firm (recall Profits = Revenue – Costs) (Preliminary Topic 2 – Consumers and Business). As profits increase, Murray Goulburn will also be able to increase the cash flow to above what shareholders were expecting, therefore also exceeding shareholder expectations.
  • Murray Goulburn is able to reduce its promised price to farmers given that farmers belong to a fragmented market and Murray Goulburn, as Australia’s largest milk processor has significant market power. In other words, there are enough suppliers in the market for Murray Goulburn to establish a new price for milk given that it is a major source of demand (Preliminary Topic 3 – Markets).
  • Given that Murray Goulburn will be paying lower costs for its inputs, its competitors are also expected to renegotiate their contracts with milk suppliers. This is because with lower prices of inputs, Murray Goulburn can increase its profits more easily than its competitors which will make it more appealing to shareholders (Preliminary Topic 2 – Consumers and Business). Therefore, it is likely that competitors will start considering reducing their milk prices.
  • Although reduced milk prices will be beneficial to milk processors’ profits, they will negatively impact the profits of farmers. Costs to farmers have increased this year as a result of the effects of El Nino which is causing water to become scarce. A reduction in supply of water is cause its price to increase (Preliminary Topic 3 – Markets). At the same time, a reduction in the price they receive for the provision of milk is reducing as a result of Murray Goulburn’s price cut. As such, their profits are being significantly reduced as revenue declines while costs increase. This is expected to see 10-15% farmers exit the industry as their businesses become too unprofitable.
    • The farmers who are likely to survive are those who are larger as they may benefit from economies of scale which will somewhat reduce their costs (Preliminary Topic 2 – Consumers and Business).


Theresa Dang is an economics mentor at Keystone Education. She attended Sydney Girls High and achieved an ATAR of 99.70 in 2012. She is now studying Commerce and Law at the University of Sydney. She has experience in a global technology firm and a mutual fund.


Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of four scholarships.