Thursday, July 26, 2012

The good news we won't believe. Inflation is extraordinarily low

A year of highs, a year of lows

Rent + 4.4%
Electricity + 10.7%
Gas + 8%
Water + 9.3%
Child care + 9.8%
Education + 6.1%
Petrol + 2.5%
Meat and seafood - 2.1%
Vegetables - 2.8%
Children’s clothes - 1.8%
Household appliances - 2.7%
Cars - 1.6%
Fruit - 37.8%

Inflation has slipped to its lowest point this century, giving the Reserve Bank ample room to further cut interest rates and calling into question claims that Australians are pressured by the cost of living.

The new annual inflation rate of 1.2 per cent reflects dramatic slides in the prices of fruit and vegetables and also in the prices of staples such as bread which is now 3 per cent cheaper than when opposition leader Tony Abbott identified it as problem during the 2010 election.

The Bureau of Statistics says the price of cheese has slipped 1.9 per cent in the past year, the price of meat and seafood 2.1 per cent, the price of children’s clothes 1.8 per cent, the price of cars 1.6 per cent and the price of household appliances 2.7 per cent.

Increasing sharply at the same time are large regular expenses such as rent (up 4.4 per cent), electricity (10.7 per cent), gas (8 per cent) and water and sewage (9.3 per cent). The price of child care has climbed 9.8 per cent in the past year, education an average of 6.1 per cent, insurance 7 per cent and petrol 2.5 per cent.

The clear pattern is that the prices of goods that can be imported have been sliding, down 2 per cent over the year, while the prices of goods and services produced at home have been climbing, gaining 3.3 per cent over the year... But the figures the prices of imported goods may be stabilising. In the past three months they climbed back 0.7 per cent rather than continuing to fall.

Treasurer Wayne Swan called on “doomsayers and rentseekers” to acknowledge that when averaged by the amounts Australians actually spent, prices climbed just 1.2 per cent, less than at any time since the late 1990s.

Shadow treasurer Joe Hockey said the prices that were rising the fastest were those Australians were least able to avoid paying.

He reached back five years to claim that since Labor had been in office electricity charges had climbed 64 per cent, water rates 59 per cent, insurance premiums 35 per cent and education fees 31 per cent.

“This is before the carbon tax,” he said. “Now is not the time to drive up the price of everything.”

Mr Swan said the low inflation rate completed a set of figures far better than at any point during the previous Coalition government’s term in office.

“It is rare in our economic history to have low unemployment, a huge investment pipeline, healthy consumption and contained inflation at the same time. It’s the best possible combination. But because it is good news it doesn’t tend to get treated like the hand-wringing, the alarmist predictions from people who want to peddle gloom and doom in our economy.”

Asked who he was referring to Mr Swan refused to be drawn, identifying: “anyone out there who is pushing their own barrow”.

On Monday private sector forecaster Delloite Access Economics said the budget surplus had evaporated and the mining investment boom has only two years to run.

Financial markets were unimpressed with the inflation result, pushing the share market slightly lower on fears Spain may be headed for a financial bailout.

“Inflation is low which leaves the door open for the Reserve Bank to cut rates further if it deems it necessary,” said HSBC chief economist Paul Bloxham. “But it has already cut rates 0.75 points in the past three months. On local conditions alone it is unlikely to go further. But the risks to the global economy are skewed to the downside. There is little standing in the way of the Bank responding to those risks.”

The average of the so-called underlying rates watched by the Reserve Bank is 1.95 per cent, slightly below its target band of 2 to 3 per cent.

In today's Canberra Times, Sydney Morning Herald and Age

Related Posts

. Getting inflation wrong

. You wouldn't read about it, much. Living costs are slowing

. Want to see underlying inflation of just 1.95 per cent?



Anonymous said...

The inflation number sounds good but it is correct that "the prices that were rising the fastest were those Australians were least able to avoid paying."

Rents, electricity, water, gas and petrol are expenses that for many people can't be avoided. For many people, the cost of living is rising by much more than 1.2%.

I suppose that if you have a well-paid job, only do public transport, are a vegetarian, own your own place and use a small amount of electricity, water and gas, life would never have been better.

It's a shame that the politicians (and the RBA) aren't arguing that the unemployment rate should be much lower and talking about how they plan to make it happen.

Yes, we are in better shape than most of the world. But we can still do much better. There are far too many people out there who are struggling and can't get a job even though they really want one. What is the government and the opposition planning to do about it? Nothing!

Peter Martin said...


You say:

"For many people, the cost of living is rising by much more than 1.2%."

We will get a good idea next Wednesday when the ABS releases its living cost estimates for people in different situations - pensioners, workers, beneficiaries etc..

Nic Stuart said...

Dear Peter,
Can you please remind me of exactly why low inflation is 'good' news in an Advanced Industrial Economy that depends on increased production and sales of goods for growth?
I still have considerable reservations about the way inflation is measured however, even allowing for this, how is it possible to explain Labor's standing in the polls if the economy really is going gangbusters?
Low inflation, low unemployment . . . just what does a government have to do to get re-elected?

Anonymous said...

Hi Peter,

Thanks for your response. It'll be interesting to see those figures when they are released.


I would disagree that unemployment is low. If you were surveyed by the ABS, and you had been trying to get a job for some time but didn't actively try in the past month because you'd become disheartened by your failure to get a job, you won't be considered unemployed. To me, that is just pure bs. Obviously such a person is unemployed because they don't have a job. There are lots of people in that situation. So, real unemployment is much higher than what the figures show. Also, if you worked for 3 hours per week, which is not even close to enough to live on, you would be considered employed. That's another reason why the unemployment figures are misleading. There is a high rate of underemployment in Australia.

If unemployment was genuinely low, together with much lower underemployment, then I think the government would be doing much better in the polls.

However, the main reason I believe that the government is doing so badly in the polls is the way they have handled the politics. They have backflipped on a number of things that they said they truly believed in. Their biggest stupidity was to say there'll be no carbon tax before the election and then bring one in after the election. That understandbly angered many people, who don't seem to care whether or not it is good policy.

Nic Stuart said...

Dear Anon,
Thanks. Yes, I agree. My point is to question the accuracy of both the unemployment and the inflation stats. Nevertheless, having said that I think you are correct about the governments inability to 'sell' more or less anything, and the chief culprit (other than the PM) is, drum-roll, thank you and step forward . . . Wayne Swan.

Anonymous said...


Just thought I should point out that there are very important reasons they ABS and other nations use the actively looking criteria. You can find them pretty easily if you did even a little bit of research.

Second point is that the ABS actually adressed these concerns recently...

So there is really nothing wrong with the stats just the subjective viewpoints of those who have a half empty perspective

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