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Australia has slipped into deflation, but what does that mean?

Published: (Updated: ) in Australian News by .

Australia is now in deflation for the first time in 22 years.

Australia's consumer price index (or CPI) fell 1.9 per cent in June 2020 quarter, marking the biggest plunge in the history of the measurement.

New data from the Australian Bureau of Statistics (ABS) shows the dip was the largest quarterly fall in the 72-year history of tracking the CPI.

The CPI is a measure of retail prices of what the ABS calls a "constant basket of goods and services" for Australian households.

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Petrol prices are going up ahead of the long weekend.

It includes things like the cost of childcare, fuel, education, household appliances and groceries.

This is how the ABS tracks inflation, or the gradual increase in the cost of goods over time.

According to the ABS, the annual inflation rate was a negative 0.3 per cent in the 12 months to June 2020 – meaning Australia is officially in "deflation" for the third time since 1949.

Still confused? Here's a quick breakdown on deflation:

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What is deflation?

Deflation is the reduction of the general level of prices of goods and services in an economy.

It includes the economy as a whole, so while petrol may be cheaper currently, other things may be slowly getting more expensive (like the cost of a Big Mac).

The biggest contributors to Australia's deflation in the June quarter were childcare (costs down 95 per cent due to government initiatives), petrol (down 19.3 per cent due to oil prices) and pre-school costs (down 16.2 per cent).

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Is deflation a good thing?

Like all economic principles, deflation is not really "good" or "bad" but rather a measure of cash flow as a whole.

When prices of goods are low, consumers have more purchasing power and may even consume - or buy - more.

But if prices are forced lower by circumstance, businesses may not make enough profit to pay workers, leading to job losses and to families tightening their spending.

Many economists will argue that a small, sustained level of inflation keeps businesses profitable and household spending relatively consistent.

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Should I be worried?

It's best to look at these numbers in context.

The amount of deflation in the 12 months to the June 2020 quarter was 0.3 per cent.

According to the Chief Economist for the ABS Bruce Hockman, this was "only the third time annual inflation has been negative" since 1949.

The other times it went negative were in 1962 and 1997-1998.

Mr Hockman says if it weren't for the fall in childcare costs and fuel in the June quarter, the CPI would have risen 0.1 per cent.

In terms of being worried, that largely comes down to your day-to-day financial health like employment and household costs – essentially your incoming and outgoing cash flow.

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The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.

Source: 9News

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