Friday, July 17, 2009

The price plunge you don't notice

And the price explosion you do

If you don't believe Australia's published inflation rate, it could be because you're buying frozen peas.

In the year to March the Sydney price of a 500 gram packet of peas climbed from $1.75 to $2.18 according to the Bureau of Statistics - a jump of 24 per cent.

The price of a sliced white loaf jumped from $3.50 to $3.75 - an increase of 7 per cent.

And yet Australia's "official" inflation rate is just 2.5 per cent. It isn't the rate most of us think we are paying.

Now in an effort to reconcile the statistics with reality researchers from the Reserve Bank have gone back 16 years and discovered that the prices that have moved the least are likely to be those we notice the least...

We tend to buy manufactured goods relatively rarely, even if we sometimes spend up big when we do. The paper from Reserve Bank economists David Orsmond and Tom Rosewall says in aggregate the price of manufactured goods "has barely changed" since 1993.

Audio visual equipment has actually halved in price since in that time, motor cars are 10 per cent cheaper. If that doesn't accord with your view of reality it could be because you're comparing the prices that are on the labels. The Bureau of Statistics adjusts these prices to take account of improvements in quality. One thousand dollars buys a much better computer, or a much better sound system than it used to.

Clothes and shoes cost roughly the same as before in dollar terms, and household goods a just 20 per cent more 16 years on.

But the things we buy regularly and can't do without; food beverages and tobacco, have soared in price since 1993, climbing just short of 90 per cent, about 4 per cent per year.

Services such as insurance, education, health, rents and restaurant meals are up 75 per cent, with the price of insurance climbing 6.5 per cent per year, the price of education 5.2 per cent and the price of restaurant and takeaway meals 3.4 per cent.

The reason for the difference according to the economists is that services and food "typically have a high domestic labour cost component, whereas manufactured goods prices are more dependent on developments in world prices".

The cost of the Australian labour used in making goods has increased by 2.7 per cent per year according to the paper. In contrast the price of imported goods has climbed just 0.4 per cent per year.

Tobacco is a special case. Ever-increasing taxes have tripled its price since 1993.

It adds to a pattern where the things we are addicted to or can't live without and buy frequently climb in price quite quickly. The purchases we can put off or rarely make increase in price very slowly, or fall in price when improvements in their quality are taken into account.

Other Reserve Bank figures released yesterday show moving away from credit cards with the average balance down 0.5 per cent over the year and the number of cash advances down 20 per cent.

Going Up

Tobacco 7.2%
Insurance 6.5%
Education 5.2%
Fruit & vegetables 4.1%
Bread & cereals 3.8%
Petrol 3.6%
Restaurant & takeaway 3.4%
Alcohol 3.3%

Going Down

Clothing and footwear -0.1%
Motor vehicles -0.8%
Audio visual equipment -4.7%

Average annual price changes 1993 - 2009

RBA Trends in Relative Consumer Prices, July Bulletin

Published in today's SMH and Age