Wednesday’s Consumer Price Index will play a major part, one way or another, in the election campaign. A poor figure for the quarter of a rise of 0.8% or more could see the Reserve Bank lifted rates after the Melbourne Cup is run (at the moment Master O’Reilly probably has as much chance of winning the race at the moment as interest rates rising).

Goldman Sachs JBWere thinks so: the investment bank this morning told clients that it thought the RBA wouldn’t politicise interest rates by raising them during the campaign. But it has raised its forecasts on rates, growth and inflation because of the tax cuts auction. But it will pay to look closer into the CPI because it is becoming clear it is not telling the whole story on how much inflation is really rising in Australia.

No matter how big a rise is reported, you can rest assured that for most of us, it will understate the situation in quite a noticeable way.

That’s quite clear from Friday’s release of the Australian Bureau of Statistics International Trade Price Indexes (Import Price and Export Price Indexes) for the September quarter. They received little publicity in the weekend papers.

That was a pity because there was apparent good news in them for inflation. The Australian Bureau of Statistics reported that import prices fell by 0.8% in the September quarter and by 5.5% for the year to September. The ABS said the fall in the latest quarter followed the surprise 0.1% increase in June quarter 2007. The ABS said in its commentary on Friday that the fall in the September quarter was “driven by price falls in telecommunications and sound-recording and reproducing apparatus and equipment (-5.6%), office machines and ADP machines (-4.9%) and road vehicles (-1.8%).”

That’s the strong Aussie dollar at work. It rose from just over 85 US at the start of July to around 88.30 at the end of September (in between it slumped to less than 77 US but bounced back strongly). That seems to have been enough to have driven down import prices for the quarter and helped over the year to the end of September.

But this is misleading. These lower prices for imported consumer products will flow through into the CPI, as will lower prices for computer and other IT products. While that helps business and the thousands of people who buy games, software, LCDs, computers and the like, that isn’t part of everyday living costs. You don’t eat LCDs for breakfast do you?

The ABS also said “These decreases were partly offset by increases in prices paid for petroleum, petroleum products and related materials (+2.7%) and iron and steel (+3.8%).”

They are the sort of cost rises that will worry the RBA because they will flow through into producer prices. The ABS pointed out that overall, the price of consumer goods fell by 1.0% in the quarter and 4.0% over the year. The prices for imported consumer goods have been declining for the best part of five years, driven by the combined effect of a rising exchange rate (up 33% per cent in the past five years) and the flow of goods onto global markets that have steady or falling prices – especially from China.

That’s benefited the likes of retailers such as Dick Smith and Tandy at Woolies, Harvey Norman and JB Hi-Fi, but not people who don’t splurge on Plasma and LCD screens, Ipods or the latest computers and games.

The drought is boosting grain, flour, bread, milk and meat costs across the board and will continue doing so into next year: these pressures have probably offset any benefit from falling petrol prices, for instance. Rising food prices affect more people than do falling prices for TV screens, software, Ipods or the like.

The RBA strips out “volatile food and energy costs” as it calls them from its own inflation measures. These are what are called tradeables: their price can fluctuate with currency, climate or seasonal changes. Domestic petrol prices are a major tradeable. They’ve fallen in the past six weeks because the higher dollar has offset rising prices. But that will change this quarter as oil bounces around $US88-$US90 a barrel.

These tradeables (such as consumer goods) account for around 40% (or a touch more) of the CPI. Non-tradeables make up the other 60% or so of the CPI and are the real inflation problem.

They’re the ones set by the likes of the banks, real estate developers, Governments of all levels and persuasions, and government trading busineses (such as the NSW power industry). Non-tradeables include government fees, costs and charges, rents and housing costs (which are now probably the single biggest influence on the CPI, according to some analysis).

These are the nasties that rarely seem to dip or ease significantly. They will be the little “gorillas” in the back of the room John Howard, Peter Costello, Kev Rudd or Wayne Swan won’t really talk in the election campaign. The regular indexation of beer and tobacco products has become a non-tradeable because they seldom ever fall.

Non-tradeables are also why there’s a strong element of mirage in the tax cuts on offer. They are only giving back to use the money they have filched in taxes on income, services (GST), and all those fees and charges that get quietly boosted in every budget.

State and local governments are just as culpable as Canberra: but the tax cuts from our state and local governments seem very infrequent. The banks and big oligopolies rarely give anything back to customers: shareholders get the benefits, along with management and boards.

The impact of non-tradeables didn’t feature in last night’s debate: they should. The RBA worries more about them at most times than it does about the cost of tradeables.