“This is not a time for the Treasurer to be patting himself on the back,” said Joe Hockey last week after the lowest inflation figure for more than a decade. “Today’s inflation figures from the ABS confirm that families are still facing significant cost-of-living pressures.”
Strangely, Wayne Swan actually agreed. “While the moderation in headline and underlying inflation is certainly welcome, many households continue to face cost-of-living pressures.” As Ross Gittins pointed out, it’s no wonder the government never gets any credit for its economic management if it’s always telling people that things are tough.
Exactly what CPI result would shift politicians from their obstinate insistence about “cost-of-living pressures” is unclear. A solid dose of deflation, perhaps, although that would upset asset owners. Some commentators are already claiming flat house prices are responsible for cautious consumers.
Some voters of course refuse to believe the low CPI numbers. They insist that somehow real inflation is not being captured by the ABS, either from incompetence or conspiracy (bearing in mind that all forms of denialism must ultimately resolve into conspiracy theory).
So we’ve gone through the numbers from the past decade to determine exactly what the inflation story is for Australia and how plausible it is to claim that “families are still facing significant cost of living pressures”.
The first thing to note is how inflation has tracked against income. If incomes have grown faster than inflation, people’s real spending power has increased. How have Australians fared over the past decade? Here’s annual growth in average weekly earnings for full-time adults compared to annual CPI. But to cover off low-income earners, growth in the statutory minimum wage is also included.
So AWE has grown consistently well ahead of CPI over the past decade in all but one year (2008, when inflation spiked just before the GFC hit). But until 2007, the minimum wage also grew faster than inflation. Cost-of-living pressures, to the extent that they exist, are felt much more by households with low incomes, which spend a greater proportion of their income on basics. At least until 2007, minimum wage earners also earned more than inflation; thereafter they trailed it slightly: if anyone has been doing it tough, it’s likely to be in that group in the past five years.
But has CPI accurately captured movements in significant prices? Does it capture “cost-of-living pressures”? Or does it not give the right weight to individual expenditure classes to reflect their importance to households? The ABS regularly adjusted its weightings to try to ensure CPI reflects average household expenditure, and its most recent adjustment was in 2011. So let’s look at the categories that really increased significantly.
Across 87 different expenditure classes, excluding groups and sub-groups, 16 have grown faster than AWE since 2006. According to ABS weightings, they compose 23.4% of CPI. Some of them are obvious: electricity and water head the list — they’ve annually increased on average 10% and 10.2% since 2006. But they only form 2.9% of CPI. Fruit’s next — courtesy of cyclones, but we know that by the following season prices have gone back to previous levels. Then there’s tobacco, gas, then education and health expenses; rents, too — they’ve grown at 5.5% for the past six years, though don’t tell the housing denialists that.
Just just under a quarter of CPI has grown at a rate faster than AWE — in some cases, much faster.
But balancing those big rises have been expenditure classes that have either grown minimally — less than 1%, or actually fallen. They form 21.7% of CPI. They include the obvious one, audio-visual and computing equipment, which has fallen on average 14% a year since 2006 (while increasing in capacity and capability). But clothing has also fallen: women’s clothing down 0.9% a year since 2006; kids’ clothes 1.4% a year, footwear down 0.5% a year. Cars have also been falling 0.9% a year (a key reason why we’re buying a lot of them). Most food products have increased by less than the average annual CPI figure of 2.9% (lower than the average of 3.3% from 2000-06).
In short, CPI in recent years has include plenty of big rises but they’ve been offset by big falls in other areas. You don’t buy a new computer every quarter like you have to pay a utilities bill, but if you’ve got kids you have to buy clothing regularly, and food is a staple that has mostly increased in price at a rate well below inflation, particularly during the current bout of competition between Coles and Woolworths that, for all our apparent obsession with cost of living pressures, is regarded as somehow a bad thing.
The other point to take from the data is that the expenditure classes that have risen so quickly are usually under government control, and mostly state government control. Electricity might be privatised in Victoria and South Australia but it’s state-owned in NSW and Queensland (and prices a regulated everywhere anyway) and water remains state-owned everywhere. Tobacco price rises of course reflect aggressive excise hikes. Education and health costs are wholly or partly under government control. Property rates and charges (5.6% annual growth) are local government. These form nearly all of the expenditure classes that have risen more quickly than AWE in recent years.
So people blaming the federal government for failing to ease cost-of-living pressures (such as Leigh Sales on 7.30 last week) are, to the extent that they’re even correct about a inflation in a narrow range of goods and services, have got the wrong culprit — it’s state premiers and treasurers they should be blaming.
There hasn’t been space to look at how pensioners and people on Newstart have fared — that might be task for another piece. But for wage earners, it’s difficult to see how, for all but those on the lowest incomes, “cost-of-living pressures” are anything other than the consequence of consumption choices, not real-world inflation.