It's always darkest before the dawn is an old saying worth bearing in mind amid the gloom that has pervaded the corridors at the Reserve Bank as it signals ongoing concern with a lack of inflation.
There is little doubt that Australia risks being drawn into the negative interest rate "vortex".
It's one that some argue is spreading from Japan and core parts of Europe amid sluggish global economic growth and concerns that the US has so far been unable to kick-start its economy despite massive credit injections since the global financial crisis close to a decade ago.
The concern is more than academic given the pervasive optimism that robust inflation will continue to help propel overvalued domestic residential real estate prices ever higher.
But low inflation signals weak – or negligible – wages growth, which has been evident for several years now for most "wage slaves".
Without rising wages, it becomes harder and harder to pay off ever larger mortgages. Against the backdrop of flat property prices, this could spell trouble for some home buyers who are heavily in debt.
As the Reserve Bank frets over the lack of inflation, this has sparked speculation it will slash the cash rate to around 1 per cent to 1.5 per cent before the rate-cutting cycle is finished. It is worth bearing in mind that for much of our recent economic history deflation has been just as evident as inflation.
A research paper published by the Bank of International Settlements in March last year pulled together pricing trends for all economies where data existed to analyse the impact of deflation.
In Australia, after World War II, inflation has been dominant, apart from the credit squeeze of the early 1960s. Even the savage collapse in the commercial property market of the late 1960s failed to dent the underlying trend of rising prices.
Before the war, however, was a different kettle of fish, with deflation dominant from the mid-1870s until the decade before the outbreak of World War I.
And then there was clearly the Great Depression of the early 1930s which was seared into the collective memory of many parents and grandparents.
Regionally, Victoria was hit by housing price downturns in the mid-'70s and again in the early 1990s although this failed to dent national pricing pressures.
Australia's experience of deflation prewar, flipping over to inflation more recently, has been mirrored throughout Europe, North America and also Japan, the sole country in Asia with reliable data extending through this period.
The study found only a weak link between deflation in goods and services and economic growth.
So at a time when there is surplus manufacturing capacity from steel, to auto production and far beyond, which has pressured this portion of the global economy for a generation or more, now it is the services sector's turn to suffer from pricing pressures.
The internet is forcing a wholesale reorganisation of the service sector, in financial services, retailing, the media and beyond, which is pressuring not just employment and wages but the entire structure of many industries with many jobs going offshore. These are not just call centres, but also software development, engineering services and the like.
And as costs are squeezed, this is also prompting more and more companies to complain that they are cost-takers, with their loss of pricing power leaving them in a continued cycle of cost-cutting to maintain margins.
Apart from the impact on wages, the BIS study found that concerns over the fallout from price deflation should be muted.
"Concerns about deflation ... are rooted in the view that it is very costly," the reported noted. But after reviewing 140 years of data for as many as 38 countries, it found the link to be weak, deriving largely from the Great Depression.
But of greater concern, the study found, is property price deflation at times when it is coupled with high private debt – and perhaps it is in this context the Reserve Bank's concerns with deflation should be considered.
"Asset price deflations, particularly house price deflations in the postwar era, have been more damaging," the study found, with "evidence that high private debt levels have amplified the impact of property price deflations" but with no similar link with price deflations for goods and services.
Financial markets focus on the future – and there is a flicker of a change signalled by the rise in the gold price as investors continue to price in optimism that the huge quantity of cheap credit foisted on US, Japanese and European financial markets will eventually ignite a bonfire of inflationary pressures.
That may well occur, but perhaps first we will have to navigate enduring deflationary pricing pressures which may have some way yet to run.
From investors trying to figure out which way markets are headed, to home buyers with large mortgages waiting for wage rises to get them on top of their repayment schedules as property price rises slow, hoping that the present pressures on inflation will soon run its course may be tempting. But if history is a true guide, the reality could be more complex.
