Home > Economics - General > Regular inflation in Australia: Guest post from Bruce Bradbury

Regular inflation in Australia: Guest post from Bruce Bradbury

May 26th, 2008

There’s been a fair bit of discussion of inflation in the comments threads. Bruce Bradbury of the Social Policy Research Centre has sent in a guest post (in a PDF over the fold), making the point that the cost of regular purchase, notably food, has gone up by more than the Consumer Price Index. This implies that irregular purchases (consumer durables like TV sets and cars) must have gone up by less than the CPI and in fact the inflation rate for these items over the past three years has been only 0.5 per cent. Bruce’s conclusion

This gap perhaps explains some of the divergence between the expressed concerns of consumers and the complacency of economists. Though consumers know that their next TV will be much better than their last one for much the same price, they are still struggling to meet their weekly supermarket and petrol station bills.


BradburyPost

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  1. RD
    May 26th, 2008 at 20:41 | #1

    The ABS published an experimental CPI for age pension households, but does not do so on an ongoing, up-to-date basis.

    http://www.abs.gov.au/AUSSTATS/abs@.nsf/94713ad445ff1425ca25682000192af2/1fdee0ac67d77b57ca256fa20075fc2a!OpenDocument

    In the period covered in that publication, the divergence between the pension CPI and the general CPI was not large or systematic.

    However, Bradbury shows that this is no longer likely to be the case. Given these circumstances, to understand trends in real income, the ABS should be asked to do the index on a regular basis and extend it to other types of low income households. To treat pensioners fairly, the government should change the basis of indexation to the CPI that reflects the cost of living of the people affected.

  2. observa
    May 26th, 2008 at 22:11 | #2

    The inflation genie is well and truly out of the bottle worldwide now http://www.atimes.com/atimes/Global_Economy/JE17Dj01.html
    You may need to make allowances for the Guru’s sense of humour, but he does bring you the bare horrible facts in his inimitable style. Concurs with a 9.5% steel products price rise(you can add GST to that too folks) from one of my steel suppliers, while another major has apparently thrown in the towel on price lists now. Ring them for a quote. It’s getting ugly out there. I can’t imagine the big end of town trying to tender on long lived construction projects at present.

  3. swio
    May 26th, 2008 at 22:15 | #3

    Could not agree more with RD. Large expensive items like 40in flat screen tv’s and other high cost items that are driving down inflation are not a big part of the expenditure of pensioners on a couple of hundred a week. Besides being simply unable to afford those things their stock of consumer durables is largely already established. When was the last time you saw a pensioner’s house full of things from Harvey Norman and Freedom Furniture? What people keep missing is that if the inflation stats are consistently out by even a little bit then the culmulative impact is enormous. A 1.5% mismeasurement for a decade equates to people on stagnant incomes falling 16% further behind.

  4. Thinking in old ways
    May 26th, 2008 at 22:45 | #4

    RD
    The pensioner and other cost of living indexes have been updated to June 2007 – the most recent figures are available at:
    http://www.abs.gov.au/AUSSTATS/abs@.nsf/Latestproducts/6463.0Main%20Features2Jun%202007?opendocument&tabname=Summary&prodno=6463.0&issue=Jun%202007&num=&view=

    They show that after a couple of years of an opening – but still quite small gap between the CPI and the age pensioner index(I think it is just over 2 percentage points over a 9 year period) – that the series have started to come back together.

    The ABS site also has the detailed weighting patterns for the pensioner and other indexes.

    The issue that Bruce raises about the price trends in tradeable versus non-tradeable goods is most probably close to the heart of the RBA. Given the level of inflation in China and the likelihood that the dollar cannot keep rising it is probable that we cannot expect headline inflation to continue to benefit from the lower increase in prices in the tradeable sector.

  5. Thinking in old ways
    May 26th, 2008 at 23:35 | #5

    Looking at Bruce’s figures a little bit more it is rather hard to understand the rationale for all the inclusions and exclusions – and what you include or do not include makes a big difference.

    If you include clothing (which after all most people buy) this drops the CPI he calculates down to an annual rate of around 4.0%. Include car purchase (and the ABS figure includes both new and used cars) and it drops down to 3.8%, include house repairs and it drops down to 3.7%.

    Are these items any more or less relevant to household costs than private school fees and tertiary fees that Bruce includes in his base calculations.

    Also did everyone continue to purchase the same set of fruit and vegetables as prices rose – or were they like normal consumers and they changed what they bought on the basis of relative prices. (One of the reasons why – despite swio’s claim – that CPIs tend to overstate price rises.)

  6. TerjeP
    May 27th, 2008 at 08:40 | #6

    I still think that it is stupid to have a 17% tax on clothing. Somewhat ironic really given the fuss about a 10% GST on food.

    To tame inflation we need our currency to be stronger relative to commodities. That would make imported consumer goods and reduce the demand pressure on exports. However it seems that we will fiddle with interest rates and ride the spiral.

  7. TerjeP
    May 27th, 2008 at 08:43 | #7

    The word “cheaper” should have been include after “imported consumer goods”.

  8. Socrates
    May 27th, 2008 at 09:11 | #8

    First JQ thanks for running this thread, and to Bruce Bradbury for the excellent little piece of work on “regular” inflation.

    If I understand it correctly, when you consider regular inflation at 4.3% not 3%, and allow for mortgage interest missing from the equation, you could be looking at inflation measured in the “old” (1970s/80s) way at perhaps 6%, which is significant. I think it would be very interestign if someone with access to the relevant databases could crunch the numbers to continue the old indices forward and see what the real inflation history of the 1990s was.

    Observa, your comment on large construction projects is exactly why I raised this question in the Monday thread. I work in transport infrastructure and costing those projects in the past five years has indeed become very difficult.

  9. May 27th, 2008 at 10:05 | #9

    Tiow: My inclusions are not based on a concept of what goods are most ‘relevant to household costs’ or which are most ‘needed’. I simply group goods according to how regularly they are purchased – because this will affect how people subjectively experience price rises.

    I think it is very difficult to draw up a list of priority needs. I’m sure there are many people who would see a new mobile phone (or even a plasma TV) as much more of a necessity than new clothing. I have included all regular but infrequent expenditures like school fees in the regular category, though I can see there is an argument that maybe these are too infrequent for people to pay much attention to them.

    Regarding adjusting to relative prices: Economic theory says we should take account of these substitution possibilities. However, in the very short term, these adjustments can be painful. So it is valuable to look at trends in fixed-weight indices (like the CPI and my regular measure).

    Socrates: I doubt including mortgage interest would have such a big impact. However, I agree that this is a calculation worth doing.

  10. Spiros
    May 27th, 2008 at 10:27 | #10

    “Though consumers know that their next TV will be much better than their last one for much the same price, they are still struggling to meet their weekly supermarket and petrol station bills.”

    But you could frame the problem the other way around.

    “Consumers got a big saving on their last TV, and used that saving to pay for higher weekly supermarket and petrol station bills. Since the big saving occurred upfront, and the higher regular bills occur over time, consumers are better off”.

    Or the big TV saving could have occurred in the middle. Sounds like swings and roundabouts to me. Of course consumers may perceive themselves to be worse off with this pattern of price increases and their timing, but doesn’t mean that there’s been any actual struggle.

  11. rossco
    May 27th, 2008 at 11:19 | #11

    Commonwealth superannuation pensions (and Defence Force pensions) are adjusted twice yearly on 1 Jan and 1 July based on CPI movements. There was no increase from 1 July 2007 because the increase in CPI for period up to March 2007 was too small to warrant an adjustment. It seems that the savings on plasma TVs outweighed the increased cost of food, clothing etc. Unfortunately I didn’t buy a plasma (still haven’t) but did have to keep buying food.

  12. Thinking in old ways
    May 27th, 2008 at 12:25 | #12

    Bruce

    I get where you are coming from – but I still think on this basis the exclusion of clothing is a little bit dodgy – especially if you have kids.

    Also why then include quite irregular bills – such as water and insurance on the basis of regularity of purchase (as opposed to consumption).

    More importantly what your clarification highlights is that your measure is something more akin to a short-term experiential measure – and not a ‘core’ measure of basic needs – as some of the other commentators have taken it to be.

    Socrates

    The ABS analytical cost of living index for employees is largely a series which calculates cpi in the traditional way – it looks at the cost for this subset of households only (as ABS used to) and it treats mortgage repayments as an expenditure item that changes with changes with changes in mortgage rates. The link I gave earlier should get you through to it.

  13. May 27th, 2008 at 13:07 | #13

    Spiros: I think I largely agree with you. That is, I’m raising this concept of ‘regular inflation’ mainly as a way of thinking about how people perceive inflation, rather than saying that this is a better way of measuring their standard of living.

    The fact that many durable goods are much cheaper _is_ relevant to living standards and a standard of living index should take this into account. I think you would also find that the share of low income families’ spending on durables (or irregular goods) is not very different from the average.

    That said, I do find the discussion here about a ‘core’ measure of basic needs interesting. Given the diversity of, even low-income, families’ spending patterns, how would we go about defining such a measure?

  14. MH
    May 27th, 2008 at 13:12 | #14

    This debate has begun to get some momentum in the US as well. Contributors here might be interested in Williams (Oakland based Economist) web site which actually does the analysis on US data and he has his own suspicions and views as to the validity of CPI measures given the changes over time.

    Anyway here’s the thread for those interested:
    http://www.shadowstats.com/

  15. MH
    May 27th, 2008 at 13:15 | #15

    PS This is not a plug for Williams pay-site by the wat but the data is there. I get it elsewhere via undisclosed source from Williams. Very interesting reading. Says a lot about statistical methodology and group consensus as well amongst the econometricians.

  16. May 27th, 2008 at 14:59 | #16

    Pensioners may not buy massive plasma TVs, but they buy toasters, microwave ovens, electric blankets, 51cm tellies, and set-top boxes so that they can watch ABC2.

    It’d be nice to have some more empirical data on these measures, to see whether who has been worst-hit by the price rises in food, fuel etc.

  17. TerjeP (say tay-a)
    May 27th, 2008 at 17:28 | #17

    I get where you are coming from – but I still think on this basis the exclusion of clothing is a little bit dodgy – especially if you have kids.

    Humbug. I have three little ones under 10 and we have cupboards full of clothes due to the endless generosity of neighbours, friends, strangers and family. There is an entire underground operation to circulate kids clothes and we struggle to give the stuff away. And unlike the hand me downs I wore as a child this is all good quality posh brands because kids grow quicker than the clothes wear out. Anybody spending money on kids clothes is throwing away good loot or simply indulging in a little consumerism. Even those people being genereous to us are almost entirely passing on stuff they themselvers were given. There is a large sunk investement in kids clothes stockpiled across the country.

    Of course I still think the 17% tax on clothing is stupid.

  18. TerjeP (say tay-a)
    May 27th, 2008 at 17:30 | #18

    Robert – almost nobody watches the ABC. Otherwise they would have better ratings.

  19. observa
    May 27th, 2008 at 23:16 | #19

    “Of course I still think the 17% tax on clothing is stupid.”
    So does the lad and his mates. They use ebay for those designer brands like Billabong boardies. Anything from OS costing under $1000AU including postage and handling escapes all such tax and GST. It’s like shopping duty free without the cost of airfares, albeit like air travellers you have to be aware of weight and volume considerations. He just bought another pair of Billabong boardies from a UK seller in GBP and they were posted to him direct from Thailand in 5 days for under half the cost of the local wares. By my reckoning too with ebay, the amount of Chinese students and immigrants operating as local tills in Oz for Chinese factories back home must be grating the ATO somewhat. Perhaps they ought to be listening to that smart bloke banging on about the need for a new constitutional marketplace or some such. Anyhow, give it up fellers. You know the current one’s stuffed. Ten thousand bloody pages and counting and now they want you to ring them for a verbal opinion, err..’ruling’. Ring my Chinese student broker more like it.

  20. wizofaus
    May 28th, 2008 at 12:21 | #20

    Terje – I’d be willing to bet that at least 50% of Australian households watch ABC on a weekly basis. Though I’m not sure what stats are available.
    The reason they don’t have high ratings is because there are no individual shows that attract very big adult audiences, and because I suspect ratings don’t count how many children are watching playschool or sesame street.
    If “almost nobody watches the ABC” then I wonder why opinion poll after opinion poll reveals that very very few people believe it should get less funding, and quite a substantial number believe they should get more?

  21. wizofaus
    May 28th, 2008 at 12:22 | #21

    http://www.abc.net.au/corp/pubs/speeches/s1393609.htm

    “Over 13 million Australians watch ABC each week”

    So I reckon my 50% of households is not far off.

  22. TerjeP (say tay-a)
    May 28th, 2008 at 23:42 | #22

    Wizofaus – I was making a flipant and sarcastic remark about the ABC in response to a simplistic generalisation. I didn’t expect a literal interpretation. Sorry for any concern caused. It’s just that the ABC is such a sacred cow in some quarters that kicking it occassionally becomes quite irresitable.

  23. May 29th, 2008 at 22:21 | #23

    Also, the way the ABC moos when kicked is very funny.

    From page 48 of Monday’s Senate Estimates hearing, Mark Scott has some fun with the relevant senators – http://www.aph.gov.au/hansard/senate/commttee/S10841.pdf

    I may be perverse. but I pissed myself over some of this. It helps to know that Kemp and Conroy are said to be friends.

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