Wednesday, January 26, 2011

Here's the bad news. Food was soaring before the flood

Going up:        Fruit prices +15%
                       Vegetables +11%
                       Petrol + 2%
                       Rent +1%

Going down:   Chidren's clothes - 1%
                       Major appliances - 2%
                       Women's clothes -3%
                       Computers, HiFi - 5%
                       Men's sox, briefs -7%

                              ABS 6401.0 December quarter 2010

Food prices were soaring before the full force of the floods that wrecked Australia's Queensland, northern NSW and Victorian foodbowls. New figures show retail fruit prices jumped an extraordinary 15 per cent between the September and December quarters of last year, and vegetable prices 11 cent.

Along the east coast the rises were even steeper with fruit prices up 17 per cent in Sydney and Brisbane and 16 per cent in Melbourne. Vegetable prices climbed 15 and 10 per cent.

Mostly unrelated to the floods, the supply shortages were just a taste of what's in store with Treasurer Wayne Swan yesterday outlining official figures showing 80 per net of Australia's beetroot is produced in flood-affected areas as well as 60 per cent of sweet potatoes and zucchini, mandarins and spring onions.

"Many families will be doing it tough at the checkout when the price hikes flow through in the weeks and months ahead," he said responding to an otherwise benign inflation result of just 0.4 per cent for the quarter and 2.7 per cent for the year to December.

TD Securities economist Annette Beacher said she had penciled in a further jump of 50 per cent in fruit prices in the March quarter... a "guesstimate" based on the spike in banana prices after Cyclone Larry wiped out 80 per cent of Australia's banana crop in 2006.

"There's a wider variety of produce affected, but on the other hand there's scope for importing which there wasn't for bananas," she said.

Commonwealth Bank economist Michael Blythe said the days of relatively cheap food were ending. Prices would continue to climb even after impact of the floods had passed.

"Rapid income growth in emerging economies is lifting the demand for food," he said. "Economic history shows that the largest increase in food consumption typically occurs as incomes rise from low levels. Most of any rise in income goes on food, either more of it or better quality."

"The other driver is the expansion of biofuels which will absorb more agricultural production over time. The Food & Agriculture Organisation believes global food prices have climbed 46 per cent over the past four years. Australia is not immune."

The Reserve Bank's preferred so-called underlying measures of inflation were tame at 0.4 per cent for the quarter and 2.3 per cent for the year. These measures underweight large price movements such as those for food and for petrol which jumped 2 per cent.

Weighing inflation down was heavy discounting in the face of weak consumer demand and rapidly falling prices of imported electronic goods such as computers and audio visual equipment which slipped 5 per cent in the quarter and 18 per cent over the year.

"The Reserve Bank over-estimated the strength of the economy when it lifted rates in November," said Commonwealth Securities economist Craig James.

"The economy is now struggling for momentum, keeping downward pressure on prices. Certainly interest rates won’t be rising any time soon."

The December figure was also artifically depressed by the operation of the Pharmaceutical Benefits Scheme which cuts the price of prescription drugs to zero toward the end of the year for heavy users.

The March quarter figures will be boosted by higher recorded pharmaceutical prices and by increases in education prices at the start of the school year.

Published in today's SMH and Age

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