Saturday, July 31, 2010

Now the good news, if you can believe it

Strange things happen in election campaigns. When we learnt this week that consumer prices rose only modestly in the June quarter, the media greeted this as great news for Julia Gillard and even for the Reserve Bank governor, Glenn Stevens.

But no one observed it was great news for all those voters who, the pollies inform us, have been whingeing loud and long about the rising cost of living.

And you wouldn't believe it: Joe Hockey portrayed it as bad news for voters. Proof positive they had plenty to whinge about.

The figures from the Australian Bureau of Statistics showed the consumer price index rose by 0.6 per cent during the quarter and by 3.1 over the year to June. Doesn't sound too terrible to me.

But the jubilation conferred on Gillard rose from the news on "underlying inflation" - the general trend in prices, with exceptionally large price changes removed - which showed a rise of 0.5 per cent for the quarter and 2.7 for the year.

This is the first time the underlying rate has been within the Reserve Bank's 2 to 3 per cent target range for almost three years, and was a lot lower than economists were expecting. It eliminated the likelihood the Reserve Bank board would see a need to raise the official interest rate another notch at its meeting on Tuesday.

You'd think this was good news primarily for people with mortgages and other loans (and bad news for people with fixed-interest investments), but for political journalists it's good news for Gillard and her government.

But how did the opposition contrive to believe it was bad news for people worried about the rising cost of living? Easy. The prices of some items in the basket of goods and services that makes up the index have risen a lot in recent times, whereas other prices have fallen a bit.

Put the two together and you're left with the overall cost of living rising only a little faster than usual.

But why do something so sensible? Why not ignore the prices that fell or rose only moderately and focus solely on those that rose a lot? Just what Hockey did. He pointed to increases in the price of electricity (up 18 per cent over the year to June), gas (10 per cent), water rates (14 per cent) and health services (6 per cent).

"For everyday Australians, the bills that they have to pay have gone up dramatically," he concluded.

And all he had to do to reach that convenient conclusion was ignore the falls in the prices of cheese, breakfast cereals, beef, pork, bacon and ham, fruit, eggs, jams and spreads, tea and coffee, and fats and oils, which helped to limit the annual increase in the cost of food (a major item in any household's budget) to just 1.4 per cent.

Clothing and footwear prices were down by almost 4 per cent, furniture and furnishings prices were down 1 per cent, major household appliances prices down 2 per cent, toiletries and personal care product prices down 2 per cent and motor car prices down almost 1 per cent.

Audio, visual and computing equipment prices were down 20 per cent, sporting equipment prices down 3 per cent, toys and game prices down a fraction and domestic holiday prices down 2 per cent.

All those were changes over the year to June. Looking just at the June quarter, only 49 of the 90 price categories recorded rises, the lowest number in more than five years.

So for Hockey to conclude this week's figures justified people's complaints about the rising cost of living, all he had to do was ignore about 86 categories where prices were well-behaved - with

. a surprising number of them falling -

. and focus on four categories that really were bad.

Those categories account for less than 14 per cent of household budgets. So ignore 86 per cent of your budget and focus on just 14 per cent of it and, yes, you do have a real gripe.

Does this make Hockey a liar and a cheat? No, just a politician on the make. The worst of it is that he's doing only what the whingeing punters are doing: focusing on a few bits that are going badly and ignoring all the many bits that are going fine.

Like politicians on both sides, these days, Hockey has no desire to educate the electorate - help people see they're misinformed or not thinking logically. Government pollies are happy just to humour people's mistaken notions; opposition pollies seek to exploit them.

Because humans aren't the rational calculation machines economists assume them to be, we all do this. It's the way our brains work: we remember the things that stick out (big price rises, for instance) and tend to forget things that are normal.

We remember price rises (bad news) more clearly than price falls (good news) and we simply ignore any items in our budget where the price doesn't change. In our mental consumer price index, the items whose prices rose a lot get a weight of up to 100, while those that don't change get a weight of zero and those don't rise by much or even fall don't do much better.

It's a crazy way to work out what's happening to your cost of living, but it's the way most people do it. And it explains why so many people are convinced the consumer price index has been cooked up by the government.

But what's going on with prices? Why are a few going through the roof while others are falling? What Hockey will never tell you is that a big part of the reason for the hefty rises in utility prices - electricity, gas and water - is the success of Peter Costello and his Liberal successors in demonising deficits and debt.

These outfits have delayed borrowing to expand their capacity (in the case of water this neglect has prompted heavy investment in desalination plants) and, even now, are trying to minimise their borrowing by making the present generation of users cover more of the capital cost in their quarterly bills. Thanks, Pete.

Why are so many prices falling? Partly because the appreciation of the dollar has reduced the cost of imported items, but mainly because the weakness of consumer demand following the recession the pollies say we didn't have has obliged many retailers to discount their prices to attract sales.

But all that discounting, we're asked to believe, has had no effect on the cost of living.