Little chance of deflation: academic

(AAP) Australia has very little risk of slipping into deflation, given a sharply declining local currency and still high inflation, an expert says.

Scientia Professor Peter Swan, from the School of Banking and Finance at the
University of New South Wales' Australian School of Business, said the falling
Australian dollar was putting "massive upward pressure on prices".
"Import prices are going through the roof and that enables local producers also to
raise their prices where there is competition with imports," Prof. Swan said on
Friday.
"I'm not at all confident that we will get that much decline in inflation.
"If the Australian dollar keeps falling, we're going to be in for a much higher cost
of living."
Annual inflation, as measured by the consumer price index (CPI), reached five per
cent in September quarter.
The Australian dollar backpedalled from 98.49 US cents in mid-July to a
five-and-a-half year low of 60.12 US cents in late October - a 39 per cent decline.
It closed at 62.14 US cents at Friday's local session.
Lower fuel prices are also a consequence of the global economic slowdown, with
crude oil down from a record $US147 a barrel in mid-July to about $US50.
Prof. Swan said the lower Australian dollar meant the full effect of the sinking oil
price had not been passed on to motorists and would be offset by price rises in
items such as food.
Falling prices might appear a good thing - the cost of the latest big screen
television is falling, the price of that movie ticket does not seem so exorbitant
and that weekend away was unlikely to break the budget.
However, because the economy had crawled to a halt and employers could not afford to
hire people, there was problem if you lost your job and could not find another.
Prof. Swan said borrowers suffered heavily from deflation because it increased the
real cost of paying off their loan.
"You would hate it because the real value of your debts are escalating very
rapidly," he said.
"They have to repay the loan with dollars that are now worth a lot more than when
they purchased it.
"I don't think we are likely to be in that situation."
The prospect of the United States entering into a period of deflation was raised
earlier this week when official statistics showed US prices dropped one per cent in
October for their largest monthly decline since 1947.
US Federal Reserve vice-chairman Donald Kohn said in a speech this week there was a
small risk the United States would lapse into deflation and painted an extremely
pessimistic outlook for the world's largest economy.
"I think it more likely that we will get a couple of quarters of negative growth and
inflation moderating," Dr Kohn told a conference in Washington DC.
Prof. Swan said he did not think deflation was a serious problem in the US.