CIGARETTE smoking
(Image: AAP/Regi Varghese)

It’s part of Australian folklore: prices are always rising too quickly. Try to tell people that inflation, for many years now, has only been a couple of percent a year, and you’re likely to get a sceptical reaction.

Nonetheless, that’s what the Australian Bureau of Statistics’ (ABS) Consumer Price Index (CPI) series has said for some time.

And that series is important for the Reserve Bank (RBA), which uses it as its primary guide to inflation in the economy. It will be even more important from now on because the RBA has moved to base its monetary policy decisions on actual, rather than forecast inflation.

But maybe the ABS series is indeed misleading about the actual level of inflation. Maybe inflation has actually been significantly lower than we thought.

A new piece of research by the ABS has examined the role of particular products in driving inflation in recent years — and it has important ramifications for our understanding of the economy under the Coalition.

The report looks at the impact of the taxation levied on tobacco products and their inclusion in the discretionary category of goods and services that is used to help put together the CPI.

When it calculates the CPI, the ABS puts goods and services into two categories: discretionary and non-discretionary. The categories are pretty self-explanatory — discretionary goods and services are things we have a choice about purchasing. Non-discretionary goods and services are things we’re stuck with, like electricity, water and gas.

The ABS research team examined the price movements of both groups and the CPI in the eight years from 2012 to this year. That shows that prices of non-discretionary goods and services (14.8%) increased slightly faster than for discretionary goods and services (12.9%).

But take out tobacco — where price rises have almost entirely been driven by government taxation — and a significantly different result emerges: “excluding the impact of tobacco (which more than doubled in price over the period) resulted in lower discretionary inflation of 6.4%.”

That’s a big difference from a product that the overwhelming majority of Australians don’t use. According to the Australian Institute of Health and Welfare, which regularly surveys Australians about their drug use, just 11.9% of Australian adults smoke.

Overall, CPI rose 14% in the eight years examined. Excluding the impact of tobacco from the discretionary part of the CPI would have had a significant impact on inflation measurement. The researchers concluded:

Removing tobacco reduces cumulative discretionary inflation since 2011-12 from 16% to 8%. With ABS data showing that fewer than 15% of Australians are daily smokers, removing the impact of tobacco price increases from discretionary inflation makes it more representative of the majority of the population.

That would have had real effects. It would have fed through to lower cost and tax increases linked to CPI (like toll roads), or the age pension, which is partly based on CPI and another index based on pensioner consumption.

And it would have pressured the Reserve Bank — which spent most of the last eight years predicting wrongly that inflation was about to pick up — to reconsider its monetary policy a lot sooner than 2019, perhaps helping offset the extraordinary stagnation that gripped the economy under Scott Morrison prior to the pandemic recession.

All for the price of a ciggie.

Peter Fray

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