Philip Lowe is giving his first speech as RBA governor today in Sydney and his topic is inflation and monetary policy.
In the speech, which you can read here, he summarises the reasons he sees for the low inflation outlook both Australia and globally. He starts by noting that there’s some slack in the global economy, and also that the falls in commodity prices have created a “self-reinforcing dynamic” that have kept inflation expectations low and therefore made people reluctant to ask for large pay rises.
But he then turns to a third factor, something that has been an increasing talking point in markets and the investment community over recent years. He says that while it might be related to the first point about excess capacity in the global economy noted previously, “in my view, there is something more structural going on, driven by the globalisation of markets and technology.”
When a central banker says “there is something more structural going on”, it’s time to tune in carefully.
“Perhaps the strongest effect of globalisation is that it increases competition,” Lowe said. “This is one reason why open markets can be such a positive force for our collective good. But, in many cases, increased competition means less pricing power, which means a lower level of prices.” He then goes on to give an ultra-clear summary of what he sees as driving the low wages growth environment in Australia and around the world:
Open markets and advances in technology mean that more businesses feel that if they put their prices up, they will not only lose market share to domestic competitors but to foreign competitors as well. Many workers have a similar feeling. For some decades, workers in the manufacturing sectors in most industrialised economies have felt the pressure of competition from international trade. Today, many workers in the services sectors are now also feeling this same pressure, as they too are exposed to the increased competitive pressure from globalisation and technology. And faced with more potential competitors, workers, like firms, are less inclined to put their prices up.
So technology is allowing the familiar competition in the manufacturing sector – which has inflicted not a small amount of pain on Australia – to spread to other parts of the economy like retail and education and beyond.
The full speech is here.