Inflation has hit 7.8% over the past year – so why aren’t Australians running for the hills? | Greg Jericho

It says a bit about how the economy (both here and around the world) is in a very different place to a year ago when figures showing inflation is growing at 7.8% – the fastest since just before the 1990s recession – is met with some optimism that the worst is behind us, rather than having everyone run screaming for the hills.

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The highest inflation growth for 32 years was driven by a big uptick in prices in the month of December. The monthly inflation figures, which the Bureau of Statistics also released yesterday, showed that prices in the month of December alone rose 1.6%.

So given such sharp increases, why should we be more sanguine than panicked?

The main reason: once you unpick the numbers, you see that for the first time since 2020, the price of discretionary items rose faster than the price of non-discretionary ones (ie those you can’t avoid paying):

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In the December quarter, the average price on discretionary items (excluding tobacco) rose 2.7%, compared with 1.3% for non-discretionary items.

Similarly, the price of services rose faster than that of goods for the first time in two years. The quarterly growth of goods prices has now fallen 2.9% in the December 2021 quarter to 1.6% in the last three months of 2022.

That suggests a lot of the international and domestic supply issues are beginning to clear up, and we’re not seeing the abnormal things that were happening in 2021 when you would have to wait months to get items bought from overseas.

We can also take some comfort from what individual items are mostly driving inflation. In the December quarter, 15 items accounted for 77% of all the growth in inflation, and the largest – by some way – was the price of domestic holidays. The cost of holidays, both here in Australia and overseas, accounted for a quarter of the total increase in inflation in the December quarter.

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That is not because everyone is so flush with cash that we’re going mad and throwing off to all parts of the globe and country. Rather, it is a reflection that we have gone from essentially no holidaying to much more domestic holidaying than in the past.

When we look at international short-term arrivals and departures, it’s clear the tourism market is massively different from what it was before the pandemic:

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This is not something the RBA can really affect. Yes, higher interest rates will reduce the ability to go on holidays, but things are so abnormal right now that prices are doing weird things – things that will be unlikely to continue.

The same can be said for games – which saw a 5.5% increase in prices in the past year. Given that the prices of games usually fall around 1.3% each year, it’s clear a degree of wackiness is occurring right now. Despite Australians on average only spending 0.6% of their weekly expenditure on games and hobbies, the increase in their prices accounted for 3.1% of all the inflation in the December quarter.

That made for some more-expensive-than-expected Christmas presents:

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This does not mean that there was no pain in these prices.

Discretionary only means that you can avoid paying, not that you did. Holidaying and buying games and toys are less discretionary activities in December than usual, so it would not be a surprise if credit cards around the nation got a big workout.

The increase in the price of rents is also continuing to flow through in the inflation numbers. Because the rent prices in the CPI accounts for all rents, not just the new ones, they can be a bit slow to move. But they are moving now.

In all capital cities rental prices are growing strongly, and – in Brisbane and Adelaide – they are growing at the fastest rate in 13 years.

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The good news is the price of new dwelling purchases by owner-occupiers looks to have peaked. As with rents, this can take a while to flow through into the CPI figures, but given house prices have fallen in the last six months of 2022 we should expect the price of this category to also fall.

Most food and drink prices in the past year also rose faster than overall inflation. Milk alone rose 18%, while bread prices were up 13%. Only the price of lamb went up by less in 2022 than it had been rising on average before the pandemic:

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And of course the pain is felt for everyone, given wages are not rising anywhere near close to 7.8%.

The Reserve Bank predicted that wages would grow by 3.1% in the 12 months to December. They actually rose by that amount in the year to September, so even if we assume a better-than-predicted wage growth in 2022 of 3.25%, that would still mean real wages are now back where they were in June 2009:

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After the GFC, real wages took about two years to get going and then from 2012 to 2020 they slowly grew. All that growth is now undone.

Despite the large increase in inflation over 2022, the latest figures do suggest a peak has likely been reached. Prices are jumping off the back of abnormal circumstances and a return of normal behaviors such as dining out. But as international supply pressure ease and we stop seeing big changes in how we spend our money, prices should begin to start calming down.

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