The consumer price index for the September quarter confirmed Australia’s annual inflation rate at 2.2 per cent

Source: BusinessSpectator

The consumer price index for the September quarter confirmed Australia’s annual inflation rate at 2.2 per cent. It is yet another low outcome, locking in another reading where inflation has been within the target band for the Reserve Bank of Australia.

While the wages data are not due for release until next month, it is all but certain that they will exceed the 2.2 per cent inflation rate (the Labour Price Index will probably rise 3 per cent or a touch more). This will lock in another year of rising real wages.

Indeed, for more than a decade, Australian workers have enjoyed rising real wages, which has seen cost of living pressures continuously ease and purchasing power rise – lifting Australian’s living standards to among the highest of any country in the world.

The 2.2 per cent inflation rate is, as always, made up of a very diverse range of price changes, both up and down, and some of these are worth digging into to see how the average consumers’ purchasing power is changing.

The items within the CPI that recorded some big price rises over the past year are probably obvious.

Tobacco prices jumped 9.2 per cent, which in large part is due to the higher government excise. Chicken prices rose 4.5 per cent while egg prices were 3.2 per cent higher, proving that the chicken came first? The price of breakfast cereals was up a healthy 4.3 per cent.

Utilities prices continued to power higher, as everyone knows. Property rates jumped 7.9 per cent, while water and sewerage costs rose 9.3 per cent, electricity was up a sizzling 6.1 per cent and gas rose 5.8 per cent. Childcare prices also surged, increasing 8.8 per cent. Medical and hospital services prices rose a solid 5.6 per cent.

Amid all of this, petrol prices rose 8.3 per cent, while urban transport fares were up 3.7 per cent. Domestic holiday travel costs rose 6.8 per cent. Education prices rose 5.6 per cent, while insurance costs were 4 per cent higher.

These price changes suggest it has been tough if you are a car driving, sick, chicken-loving smoker at university with a child who has a penchant for some fancy muesli.

But of course, no one is that narrow in their consumption spending. There were a range of items where prices fell. Indeed, there were some quite spectacular price falls within the CPI over the past year.

Lamb and goat prices dropped 10.6 per cent, vegetable prices are down 10.7 per cent while fruit prices are 5.7 per cent lower. Bring on that roast lamb with baked vegetables and buttered beans with fruit salad for desert.

Beef and veal prices were also 3.6 per cent lower, while cheese prices slid 2.8 per cent. Even coffee and tea prices were 0.5 per cent lower.

Also falling was the price of women’s clothes, down 2.2 per cent for the year, while children’s clothes fell 2.3 per cent. Furniture prices fell out of bed, dropping 3.9 per cent, while household appliance prices were 5.2 per cent lower.

The price of new cars continued to fall, dropping 3.2 per cent. At the same time, audio, visual and computer equipment prices declined 11.3 per cent. Games, toys and hobbies dropped 2.8 per cent.

If you happen to be a big-eating, hi-tech women with a strong bias to buying new clothes, fancy furniture, a new car and a love of Monopoly, Pictionary and fishing, your cost of living has actually fallen.

The point of all this is that the CPI basket of goods includes a vast array of items but in the end it is made up of the weighted average spending by the average household on that range of goods and services.

And there are always some items whose price goes up, sometimes a lot, and items whose price goes down, sometimes a lot.

The bottom line is that the Reserve Bank has, for 20 years now, ensured that on average, the annual inflation rate has been spot on 2.5 per cent, right in the middle of the target band.

This success for the Bank in having and meeting its inflation target remains an unappreciated success story of the reform agenda of the past 30 years. Not only has low inflation helped to boost living standards and wellbeing for most if not all Australians, it has allowed interest rates to remain low and relatively stable, which in itself has been a boon for business investment and consumer spending.

Long live low inflation, even if the components within the CPI record sharp divergences in price trends from time to time.

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