Showing posts with label consumer price index. Show all posts
Showing posts with label consumer price index. Show all posts

Friday, August 11, 2023

Don't be so sure we'll soon have inflation back to normal

Right now, we’re focused on getting inflation back under control and on the pain it’s causing. But it’s started slowing, with luck we’ll avoid a recession, and before long the cost of living won’t be such a worry. All will be back to normal. Is that what you think? Don’t be so sure.

There are reasons to expect that various factors will be disrupting the economy and causing prices to jump, making it hard for the Reserve Bank to keep inflation steady in its 2 per cent to 3 per cent target range.

Departing RBA governor Dr Philip Lowe warned about this late last year, and the Nobel Laureate Michael Spence, of Stanford University, has given a similar warning.

A big part of the recent surge in prices came from disruptions caused by the pandemic and the invasion of Ukraine. Such disruptions to the supply (production) side of the economy are unusual.

But Lowe and Spence warn that they’re likely to become much more common.

For about the past three decades, it was relatively easy for the Reserve and other rich-country central banks to keep the rate of inflation low and reasonably stable.

You could assume that the supply side of the economy was just sitting in the background, producing a few percentage points more goods and services each year, in line with the growth in the working population, business investment and productivity improvement.

So it was just a matter of using interest rates to manage the demand for goods and services through the undulations of the business cycle.

When households’ demand grew a bit faster than the growth in supply, you raised interest rates to discourage spending. When households’ demand was weaker than supply, you cut interest rates to encourage spending.

It was all so easy that central banks congratulated themselves for the mastery with which they’d been able to keep things on an even keel.

In truth, they were getting more help than they knew from a structural change – the growing globalisation of the world’s economies as reduced barriers to trade and foreign investment increased the trade and money flows between the developed and developing economies.

The steady growth in trade in raw materials, components and manufactured goods added to the production capacity available to the rich economies. Oversimplifying, China (and, in truth, the many emerging economies it traded with) became the global centre of manufacturing.

This huge increase in the world’s production capacity – supply – kept downward pressure on the prices of goods around the world, thus making it easy to keep inflation low.

Over time, however – and rightly so – the spare capacity was reduced as the workers in developing countries became better paid and able to consume a bigger share of world production.

Then came the pandemic and its almost instantaneous spread around the world – itself a product of globalisation. But no sooner did the threat from the virus recede than we – and the other rich countries – were hit by the worst bout of inflation in 30 years or so.

Why? Ostensibly, because of the pandemic and the consequences of our efforts to limit the spread of the virus by locking down the economy.

People all over the world, locked in their homes, spent like mad on goods they could buy online. Pretty soon there was a shortage of many goods, and a shortage of ships and shipping containers to move those goods from where they were made to where the customers were.

Then there were the price rises caused by Russia’s war on Ukraine and by the rich economies’ trade sanctions on Russia’s oil and gas. So, unusually, disruptions to supply – temporary, we hope – are a big part of the recent inflation surge.

But, the central bankers insist, the excessive zeal with which we used government spending and interest-rate cuts to protect the economy and employment during the lockdowns has left us also with excess demand for goods and services.

Not to worry. The budget surplus and dramatic reversal of interest rates will soon fix that. Whatever damage we end up doing to households, workers and businesses, demand will be back in its box and not pushing up prices.

Which brings us to the point. It’s clear to Lowe, Spence and others that disruptions to the supply side of the economy won’t be going away.

For a start, the process of globalisation, which did so much to keep inflation low, is now reversing. The disruption to supply chains during the pandemic is prompting countries to move to arrangements that are more flexible, but more costly.

The United States’ rivalry with China, and the increasing imposition of trade sanctions on countries of whose behaviour we disapprove, may move us in the direction of trading with countries we like, not those offering the best deal. If so, the costs of supply increase.

Next, the ageing of the population, which is continuing in the rich countries and spreading to China and elsewhere. This reduction in the share of the population of working age reduces the supply of people able to produce goods and services while the demand for goods and services keeps growing. Result: another source of upward pressure on prices.

And not forgetting climate change. One source of higher prices will be hiccups in the transition to renewable energy. No new coal and gas-fired power stations are being built, but the existing generators may wear out before we’ve got enough renewable energy, battery storage and expanded grid to take their place.

More directly, the greater frequency of extreme weather events is already regularly disrupting the production of fruit and vegetables, sending prices shooting up.

Drought prompts graziers to send more animals to market, causing meat prices to fall, but when the drought breaks, and they start rebuilding their herds, prices shoot up.

Put this together and it suggests we’ll have the supply side exerting steady underlying – “structural” – pressure on prices, as well as frequent adverse shocks to supply. Keeping inflation in the target range is likely to be a continuing struggle.

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Monday, August 7, 2023

Why you should and shouldn't believe what you're told about inflation

If you don’t believe prices have risen as little as the official figures say, I have good news and bad. The good news is that most Australians agree with you. The bad news is that, with two important qualifications, you’re wrong.

Last week the officials – the Australian Bureau of Statistics – reminded us of a truth that economists and the media usually gloss over: the rate of inflation, as measured by the consumer price index, can be an unreliable guide to the cost of living. Especially now.

But first, many people who go to the supermarket every week are convinced they know from personal experience that prices are rising faster than the CPI claims. Wrong. Your recollection of the price rises you’ve noticed at the supermarket recently is an utterly unreliable guide to what’s been happening to consumer prices generally.

For a start, only some fraction of the things households buy are sold in supermarkets. The CPI is a basket of the manifold goods and services we buy – some weekly, some rarely.

Apart from groceries, the basket includes the prices of clothing and footwear, furnishings, household equipment and services, healthcare, housing, electricity and gas, cars, petrol and public transport, internet fees and subscriptions, recreational equipment and admission fees, local and overseas holidays, school fees, insurance premiums and much more.

But the main reason no one’s capable of forming an accurate impression of how much prices have risen is our selective memories. Have you noticed that no one ever thinks prices have risen by less than the CPI says?

That’s because we remember the big price rises we’ve seen – they’re “salient”, as psychologists say; they stick out – but quickly forget the prices that have fallen a bit. Nor do we take much notice of prices that don’t change. We don’t, but the statisticians do – as they should to get an accurate measure of the rise in the total cost of all the stuff in the basket.

Sometimes the price of the latest model of a car or appliance has risen partly because it now does more tricks. Because they’re trying to measure “pure” price increases, the statisticians will exclude the cost of this “quality increase”.

My son, who watches his pennies, was sure the eggheads in Canberra wouldn’t have noticed “shrinkflation” – reducing the contents of packets without changing the price. No. This trick’s intended to fool the unwary punter; it doesn’t fool the statisticians. It counts as a price rise.

But now for the two reasons the CPI can indeed be misleading. The first is that averages can conceal as much as they reveal. Remember the joke about the statistician who, with his head in the oven and his feet in the fridge, said he was feeling quite comfortable on average.

The most recent news that, according to the CPI, prices rose by 0.8 per cent in the three months to the end of June, and 6 per cent over the year to June, was an average of all the households – young, middle-aged and old; smokers and non-smokers, drinkers and teetotallers, no kids and lots, renters, home buyers and outright owners – living in the eight capital cities.

Now note this. Economists, politicians and the media tend to treat the CPI and the “cost of living” as synonymous. But if you read the fine print, the bureau says that, while the CPI is a reasonably accurate measure of the prices of the goods and services in its metaphorical basket, it’s not, repeat not, a measure of anyone’s cost of living.

Why not? Partly because it does too much averaging of households in very different circumstances, but mainly because of the strange – and, frankly, misleading – way it measures the housing costs of people with mortgages.

The cost of being a home buyer is the interest component of your monthly payments on your mortgage.

But that’s not the way the CPI measures the cost of home buying. Rather, it’s measured as the price of a newly built house or unit. Which makes little sense. Many people with mortgages haven’t bought a new home.

And even those people who did buy a newly built home, did so some years ago when house prices were lower than they are now.

The bureau changed to this strange arrangement a couple of decades ago. Why? Because the Reserve Bank pressured it to. Why? Well, as you well know, the Reserve uses its manipulation of interest rates to try to keep the annual rate at which prices are rising, as measured by the CPI, between 2 and 3 per cent on average.

But, after it had adopted that target in the mid-1990s, it decided that it didn’t want the “instrument” it was using to influence prices – interest rates – to be included in the measure of prices it was targeting, the CPI.

So, the bureau – unlike other national statistical agencies – switched to measuring home buyers’ housing costs in that strange way. And the bureau began publishing, in addition to the CPI, various “living cost indexes” for “selected household types”.

The main difference between these indexes and the CPI is that home buyers’ housing cost is measured as the interest they’re paying on their loans, not the cost of a newly built house. But, of course, different types of households will have differing collections of goods and services in the basket of things they typically buy.

So, whereas the CPI tells us that prices rose by 6 per cent over the year to the end of June, the living cost indexes show rises varying between 6.3 per cent and 9.6 per cent.

Among the four selected household types (which between them cover about 90 per cent of all households), the type with the highest price rises was the employees, whose costs rose by 9.6 per cent overall.

That’s mainly because most of the people with mortgages would be is this category. Mortgage interest charges rose by 9.8 per cent in the quarter and (hang onto your hat) by 91.6 per cent over the year.

At the other end of the spectrum, supposedly “self-funded retirees” had the lowest living-cost increase of 6.3 per cent – mainly because almost all of them would own their homes outright.

Then come age pensioners, with cost rises of 6.7 per cent – few with mortgages, but some poor sods renting privately.

And finally, “other government transfer recipients” - those of working age, including people on unemployment benefits, on the disability pension and some students. They’re costs are up 7.3 per cent. Some of these would have mortgages, most would have seen big rent rises.

What this proves is that using interest rates to control prices makes the cost of living worse before making it better.

Read more >>

Friday, July 28, 2023

Why inflation is easing while rents are rising - and will keep going

It never rains but it pours. With the prices of so many things in the supermarket shooting up, now it’s rents that are rising like mad. Actually, while the overall rate of inflation is clearly slowing, rents are still on the up and up. What’s going on?

The Australian Bureau of Statistics’ consumer price index (CPI) showed prices rising by 0.8 per cent over the three months to the end of June, and by 6 per cent over the year to June. That’s down from 7.8 per cent over the year to December.

But rents in Sydney rose by 7.3 per cent over the year to June, up from 3.3 per cent over the year to December. Rents in Melbourne are now up by 5 per cent, compared with 2.2 per cent to last December.

But hang on. Those increases seem low. I’ve been reading and hearing about rent increases much bigger than that. What gives?

You’ve been reading about bigger rent increases than the CPI records because what gets most notice in the media is what economists call “advertised” rents – the asking price for presently vacant properties that have been listed with real estate agents.

So, this is the most relevant price for someone who’s decided to rent, or is wishing to move. Remember, however, in normal times landlords don’t always get as much as they ask for initially. Times like now, when the market’s so tight, they may end up with more.

But, each month, only 2 or 3 per cent of properties have a change in tenants. So most people are existing renters, wanting to sit tight, not move. It’s a safe bet they’re paying less that the price being asked of new tenants. And, though their rent will be increased soon enough, it hasn’t been yet.

The stats bureau’s increases are lower than the asking price because they include the rents actually being paid by all capital-city renters, not just the new ones.

But if the asking price is a lot higher than the average of the rents being paid by everyone, this is a good sign the average will keep going up. The rent increase is working its way through the system, so to speak.

But why are asking prices rising so much? Ask any economist, and they’ll tell you without looking: if the demand for rental accommodation exceeds the supply available, prices will rise.

That’s true. And the way we know it’s true is that vacancy rates are much lower than usual.

It’s when vacancy rates are low that landlords know now would be a good time to put up the rent. If the landlord has borrowed to buy the rental property, the rise in the interest rates they’re paying will make them very keen to do so.

But more than half of all rental properties are owned debt-free. Those landlords will probably also be keen to take advantage of this (surprisingly rare) chance to increase their prices by a lot rather than a little.

When demand is outstripping supply, the economists’ knee-jerk reaction is that we need more supply. Rush out and build a lot more rental accommodation.

But the economists who actually study the rental market aren’t so sure that’s called for. If you look back over the past decade, you see little sign that the industry has had much trouble keeping the supply up with demand.

If anything, the reverse. Until the end of 2021, rents went for years without rising very fast. Especially compared with other consumer prices, and with people’s incomes. Indeed, there were times when rents actually fell.

You didn’t know that? That’s because the media didn’t tell you. Why? Because they thought you were only interested in bad news. (And they were right.)

What’s too easily forgotten is all the ructions the rental market went through during the pandemic. What’s happening now is a return to something more normal. It’s all explained in one of the bureau’s information papers.

Official surveys show that renters tend to younger and have lower incomes than homeowners, and to devote a higher share of their disposable (that is, after-tax) income to housing costs. This is why so many renters feel the recent rent rises so keenly. And also, why the pressure is greater on people renting apartments rather than houses.

The pandemic, with its changes in population flows, vacancy rates and renters’ preferences, had big effects on rents and renters. Early in the pandemic, demand for rental properties in the inner-city markets (that is, within 12.5 kilometres of the CBD) of Sydney and Melbourne declined, as international students returned home, international migration stopped and some young adults moved back in with their parents.

Some landlords offering short-term holiday rentals switched to offering longer-term rental, further increasing the supply of rental accommodation. And the need to work from home prompted some renters to move from the inner city to suburbs further out, where the same money bought more space.

This is why inner-city rents fell during the first two years of the pandemic. Also, state governments introduced arrangements helping tenants who’d become unemployed or lost income to negotiate temporary rent reductions.

But inner-city rental markets began tightening up in late 2021, as the lockdowns ended and things began returning to normal. Some singles who’d gone back home or packed into a share house began seeking something less crowded. And, eventually, international students began returning.

So, we’ve gone from the supply of rental accommodation exceeding demand, back to stronger demand. Rents that were low or even falling are going back up.

As an economist would say, with the pandemic over, the rental market is returning to a new “equilibrium” – a fancy word for balance between supply and demand.

What we’re seeing is not so much a “crisis” as a catch-up. One reason it’s happening so fast is the higher interest rates many landlords are paying. But another reason renters are finding it so hard to cope with is that other consumer prices have risen a lot faster than their disposable incomes have.

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Friday, March 10, 2023

Can the critics prove higher profit margins are fuelling inflation?

There’s a big risk we’ll fail to learn a vital lesson from our worst inflation outbreak in decades. If inflation is such a scourge that we must pay a terrible price to get it back under control, why do we do so little to stop big companies from acquiring the power to raise their prices by more than needed to cover their rising costs?

Economists are far more comfortable thinking about inflation at the top, macro level than the bottom, micro level. At the top, inflation is caused by aggregate (total) demand for goods and services growing faster that aggregate supply – the economy’s ability to produce those goods and services.

We know from Reserve Bank figuring that more than half the price rise we’ve seen has come from temporary disruptions to the supply of production inputs, caused by the pandemic and the Ukraine war.

But, the Reserve insists, prices have also risen because demand’s been stronger than it should have been. Why? Because in our efforts to hold the economy together during the pandemic, we applied far more economic stimulus than was needed.

Economists – even those who stuffed up the stimulus – are comfortable with this explanation because it puts the blame on government. The model of the economy they carry in their heads tells them the market usually works fine, whereas it’s government intervention in the market that usually causes the problems.

So, you can see why economists were so discombobulated when one of the world’s top macroeconomists, Olivier Blanchard, tweeted about “a point which is often lost in discussions of inflation”. “Inflation,” he wrote, “is fundamentally the outcome of the distributional conflict between firms, workers and taxpayers.”

He’s saying economists need to look at the more fundamental, bottom-up factors driving inflation. Is worsening inflation caused by workers and their unions successfully demanding real wage rises higher than the increasing productivity of their labour justifies?

Or is the strength of competition insufficient to do what the mental model promises: prevent firms from raising their prices beyond what’s needed to cover their higher costs (including a “normal” return – profit – on the capital invested by their owners)?

The strange fact is that economists and econocrats have a long history of lecturing workers and unions on the need for wage restraint. Reserve Bank governor Dr Philip Lowe has been saying workers must be “flexible” and accept wage rises far less than the rise in consumer prices. That is, take a big pay cut in real terms.

But economists are infinitely more reticent in urging businesses to go easy with their price rises. I suspect this is partly because of the biases hidden in their mental model, but mainly because they know their employer, or the big-business lobby, or its media cheer squad, or all the business people on the Reserve’s board, would tear into them for daring to say such a thing.

Similarly, economists have insisted the Australian Bureau of Statistics publish any number of different measures of wage growth, but few measures of profit growth.

Last month, Dr Jim Stanford, of the Australia Institute, sought to even things up a bit by publishing figures that broke the inflation rate up into the bit caused by rising wages and the bit caused by rising profits.

He found that “excess corporate profits account for 69 per cent of additional inflation beyond the Reserve Bank’s target”, whereas rising labour costs per unit of production (that is, after adjusting for the productivity of labour) account for just 18 per cent.

What? Huh? Never seen an exercise like that before. How’d he cook that up? The business lobby went on the attack and the business press consulted a few economists who lazily dismissed it as nonsense.

But though it’s unfamiliar, it’s not as weird as you may think. Stanford was copying the method used by some crowd called the European Central Bank. What would they know?

Well, OK. But how can you take the rise in the prices of products over a period and “decompose” it (break it down) into the bit caused by rising wage costs and the bit caused by rising profits?

By taking advantage of the fact that, every time we measure the growth in gross domestic product in the “national accounts”, we measure it three different ways.

First, the growth in the nation’s expenditure on goods and services. Second, the growth in the nation’s income from wages, profits and other odds and sods. Third, the growth in the production of goods or services by each of our 19 different private and public sector industries.

In principle, each way you measure it gives you the same figure for GDP. Then you use a “deflator” to divide the growth in nominal GDP between the bit caused by higher prices and the bit caused by higher quantities – the “real” bit.

So, it’s quite legitimate to take this measure of inflation and break it up between higher wages and higher profits (leaving the bit caused by changes in taxes and subsidies).

Actually, the stats bureau’s been doing this exercise for wages (“nominal unit labour costs”) for decades, but not doing it for profits (because no one’s been keen to know the results).

Note that the “GDP deflator” is a quite different measure of inflation to the one we usually focus on: the index of consumer prices.

Note, too, that the Ukraine war has caused a huge jump in the profits of our energy producers. This windfall hasn’t been caused by businesses sneaking up their profit margins (“mark-ups”, as economists say). But the growth in mining industry profits accounts for only about half the rise in total profits over the three years to December 2022.

I’m not comfortable relying on a think tank for these figures. But if the economists who champion big business don’t like it, they should take this exercise seriously and join the debate. The government should ask the stats bureau to finish doing the numbers itself.

Read more >>

Monday, November 7, 2022

The cost of living isn't as high as we've been told

So, as we learnt the day after the budget, the cost of living leapt by 7.3 per cent over the past year, right? Wrong. Last week we were told it’s gone up no more than 6.7 per cent for employees, and 6.4 per cent for pensioners and others on benefits.

The 7.3 per cent came from the Australian Bureau of Statistics, and was the rise in the consumer price index over the year to the end of September. The other figures also came from the bureau, and were for the rise in the “living cost index” over the same period for certain types of households.

Why weren’t you told about the second lot? Because the media wanted to avoid confusing you – and because they were better news rather than worse.

Huh? What’s going on? We’re used to using the consumer price index (CPI) as a measure of the cost of living. But the bureau knows it’s not. So, a week later, it always issues its living-cost indexes for key household types – which the media always ignore.

Usually, the differences from the CPI aren’t big enough to worry about. But now they are. Why? Because mortgage interest rates are increasing rapidly. And mortgage interest charges are the main difference between the two measures.

Before late-1998, the CPI measured the housing costs of owner-occupiers according to the interest they paid on their mortgages. But this was changed at the behest of the Reserve Bank, which didn’t want its measure of inflation to go up every time it raised interest rates to get inflation down.

So, since then, the bureau has measured owner-occupiers’ housing costs by taking the price of building a new house or unit. This doesn’t make much sense, since not many people buy a newly built home each quarter. Many of us have never bought a newly built home.

This is why the bureau also calculates separate cost of living indexes, using the same prices as the CPI, but restoring mortgage interest charges, as well as giving the prices different weights to take account of the differing spending patterns of particular household types, such as age pensioners.

New dwelling prices rose by almost 21 per cent over the year to September, meaning they accounted for a quarter of the 7.3 per cent rise in the CPI. By contrast, the mortgage interest charges paid by employee households rose by more than 23 per cent, but contributed only 12 per cent (0.8 percentage points) of the 6.7 per cent rise in their total costs.

Get it? Since mortgage interest charges are a more accurate guide to the costs of owner-occupiers than new-home prices are, the CPI is significantly overstating the rise in the living costs of everyone, from employees to people on social security (and the self-proclaimed “self-funded” retirees, for that matter).

This is a sliver of good news about the extent of cost-of-living pressure on households. It’s better news for people on indexed pensions and benefits: they’ll get what amounts to a small real increase.

But it raises an obvious question: why on earth has the cost of newly built homes shot up by 21 per cent over the past year? After all, this has added hugely to the Reserve Bank’s need to fight inflation by raising interest rates, to the tune of 2.75 percentage points so far.

It’s true the pandemic has caused shortages of imported building materials, but the real blame is down to the economic mangers’ appalling own goal in using grants, tax breaks and cuts in interest rates to rev up the home building industry far beyond its capacity to expand.

It got a huge pipeline of unfilled orders and whacked up its prices, adding no less than a quarter to our soaring inflation rate. Well done, guys.

This raises a less obvious question: federal and state governments were spending unprecedented billions to hold the economy together during the pandemic and its lockdowns. With the official interest rate already down to 0.75 per cent without doing much good, was it really necessary to cut the rate to 0.1 per cent and engage in all that unconventional money creation?

It makes a good case for the new view that, while monetary policy works well when you want to slow demand, it doesn’t work well when you wish to speed it up. Especially when rates are already so low and households already so heavily indebted.

This is something those reviewing the Reserve Bank should be considering.

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Monday, August 22, 2022

Housing own goal worsens our inflation problem

A key part of the economic response to the pandemic was to rev up the housing industry. It’s boomed and now it’s busting. What’s been achieved? Mainly, a big, self-inflicted addition to our inflation problem.

That, and a lot of recent first-home buyers now getting their fingers burnt. Well done, guys.

It’s not a crime to be wise after the event. Indeed, it’s a crime not to be. As we all know, you learn more from your mistakes than your successes.

We have much to learn from our mishandling of the economic aspects of the pandemic. Because we had no experience of pandemics, our mistake was to treat the lockdowns as though they were just another recession. Turned out they’re very different.

Because downturns in home building and house prices often lead the economy into recession, then a recovery in home building leads it out, the managers of the macroeconomy assumed it would be the same this time.

The federal government offered HomeBuilder grants to people ordering new homes or major alterations. The state governments offered stamp duty concessions to first-home buyers, provided they were buying new homes.

But the doozy was the Reserve Bank’s decisions to cut the official interest rate from 0.75 per cent to 0.1 per cent, and then cut the base rate for 3- and 5-year fixed-rate mortgages.

By the end of last year, according to the Bureau of Statistics, the median house price in Sydney and Melbourne had jumped by more than 40 per cent. In the following quarter, it fell by 7 per cent in Sydney and 10 per cent in Melbourne. By all accounts, it has a lot further to fall.

Turning to building activity, we’ve seen a surge in the number of new private houses commenced per quarter, which jumped by two-thirds over the nine months to June 2021. Then it crashed over the following nine months, to be up only 14 per cent on where it was before the pandemic.

It’s no surprise commencements peaked in June 2021. Applications for the HomeBuilder grant closed 14 days into the quarter.

But to commence building a house is not necessarily to complete it a few months later. The real value of work done on new private houses per quarter rose by just 15 per cent over the nine months to June 2021. Nine months later, it was up 12 per cent on where it was before the pandemic.

For the most part, the home building industry kept working through the two big lockdowns. It seems that, between them, the nation’s macro managers took an industry that was plugging along well enough, revved it up enormously, but didn’t get it building all that many more houses, nor employing many more workers.

Perhaps it soon hit supply constraints – shortages of building materials and suitable labour. I don’t know if the industry was lobbying governments privately for special assistance, or whether it didn’t have to. Maybe pollies, federal and state, just instinctively rushed to its aid.

But I wonder if the builders didn’t particularly want to get much bigger. There are few industries more cyclical than home building. Builders are used to building activity going up and down and prices doing the same.

When demand is weak, they try to keep their team of workers and subbies together by cutting their prices, maybe even to below cost. Then, when demand is strong, they make up for it by charging all the market will bear.

It’s the height of neoclassical naivety to think it never crosses the mind of a “firm” existing outside the pages of a textbook that manipulating supply might be a profitable idea.

So maybe the builders found the thought of increasing their prices more attractive than the thought of building a bigger business to accommodate a temporary, policy-caused surge in demand.

They may have taken a lesson from those property developers with large holdings of undeveloped land on the fringes of big cities. Dr Cameron Murray, a research fellow in the Henry Halloran Trust at Sydney University, has demonstrated that the private land-bankers limit the regular release of land for development in a way that ensures the market’s never flooded and prices just keep rising.

So, back to our inflation problem. Whenever people say the recent huge surge in prices is caused largely by overseas disruptions to supply, which can’t be influenced by anything we do, and will eventually go away, the econocrats always reply that some price rises are the consequence of strong domestic demand.

That’s true. As I wrote last week, it seems clear many of our businesses – big and small – have used the cover of the big rises in the cost of their imported inputs to add a bit for luck as they pass them on to consumers.

But I saved for today the great sore thumb of excess demand adding to the price surge: the price of building a new home (excluding the cost of the land) or major renovations. This accounted for almost a third of the rise in the consumer price index in the June quarter, and jumped by more than 20 per cent over the year to June.

The price of newly built homes has a huge weight of almost 9 per cent in the CPI’s basket of goods and services, making it the highest-weighted single item in the basket. This implies that new house costs have added almost 2 percentage points of the total rise of 6.1 per cent.

When the econocrats worry about the domestic contribution to the price surge, they never admit how much of that problem has been caused by their own mishandling of the pandemic.

Indeed, when people argued that the main thing further cutting interest rates would achieve would be to increase house prices, the Reserve was unrepentant, arguing that raising house prices and demand for housing was one of the main “channels” through which lower rates lead to increased demand.

But the crazy thing is, this strange way of using the cost of a new dwelling to measure the cost of housing for home-buyers – which, I seem to recall, was introduced in 1998 after pressure from the Reserve – exaggerates the true cost for people with mortgages, especially at times like these.

Few people ever buy a new dwelling and, even if they do, rarely pay for it in cash rather borrowing the cost. This is one reason the bureau doesn’t regard the CPI as a good measure of the cost of living, but does publish separate living-cost indexes for certain types of households.

Ben Phillips, of the Centre for Economic Policy Research at the Australian National University, has used the bureau’s living-cost indexes to calculate that about 80 per cent of households had a living cost increase below the CPI’s rise of 6.1 per cent. The median (typical) increase over the past year was 4.7 per cent.

What trouble the econocrats get us into when they use housing as a macro managers’ plaything.

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Friday, May 6, 2022

Our falling real wages will help control inflation

The media always portray an increase in interest rates as terrible news – and it’s hardly surprising that’s how Anthony Albanese sees it – but Scott Morrison is right in saying rising interest rates are a sure sign of a strong economy.

Rates fall or stay low when the economy is weak, but rise when the economy’s strong growth threatens to give us a problem with high and rising inflation – which is where we are now.

One of the main things we want from a strong economy is lots of jobs, which is just what we’ve been getting. So many jobs have been created over the past two years – almost all of them full-time – that the rate of unemployment has fallen to a very low 4 per cent, and the proportion of working-age people with jobs is higher than it’s ever been.

What could be wrong with that? Well, just that the wages people have been earning from all those jobs haven’t been keeping up with the cost of living. Last week’s news that consumer prices rose by a massive 5.1 per cent over the year to March has made that much worse.

If you want to blame Morrison for that, well, he’s actually right in saying most of its causes – supply disruptions arising from the pandemic; high petrol prices caused by Russia’s war on Ukraine – have nothing to do with our government.

But wages have been struggling to keep up with prices for all the time this government’s been in office. There are things it could have been doing to encourage higher wages, but it’s failed to do them. That’s the legitimate criticism of Morrison’s economic management.

Getting back to interest rates, the truth is that a rise in rates cuts both ways. It’s bad news for people with home loans, but good news for older people living on their savings and for young people saving for a deposit on a home.

Did I mention that nothing’s ever black or white in the economy? Almost everything that happens has advantages for some people and disadvantages for others.

But leaving aside whether individuals gain or lose from higher interest rates, where does the jump in prices leave the economy? How much of a worry has inflation become? Will rates have to rise so high they threaten the recovery? Could we even end up back in recession?

This time last week some business economists were sounding pretty panicky. “The inflation genie is well and truly out of the bottle”, some assured us. Others claimed the economy was “overheating” and, since the Reserve Bank had left it so late to start raising rates, they’d have to rise a long way to get inflation back under control.

But when Reserve governor Dr Philip Lowe announced on Tuesday that the official interest rate – aka the “overnight cash rate” – had been increased by 0.25 percentage points to 0.35 per cent, warned that further rises in rates will be needed “over the period ahead”, and explained how he saw the problem and how it could be fixed, many economists seem to have calmed down.

Implicitly, Lowe refuted the claim that the economy was overheating. Even at 5.1 per cent, our inflation rate was lower than the other rich countries’, and our wage growth so far had been much lower.

So the rise in inflation “largely reflects global factors” – that is, not of our making – but “domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices”.

That is, we don’t have as big a problem as that 5 per cent figure could make you think, but the economy’s growing so strongly we could get a problem if we kept interest rates so low.

Many retailers and other firms have gone for years trying to hold down their costs, including by finding ways to save on labour costs, and avoid passing those costs on to customers, but the rise in their pandemic and Ukraine-related costs – plus the media’s incessant talk of rising prices – has emboldened them to start increasing their own prices.

Now, as Lowe explains, even if petrol and pandemic-related costs don’t fall back down, they won’t keep rising. So in time the inflation rate will fall back of its own accord, provided it doesn’t lead to our firms putting their prices up too high and giving their workers pay rises big enough to fully cover their higher living costs.

If that does happen, the once-only rise in prices coming from abroad gets into the wage-price spiral and the inflation rate stays high.

This is why Lowe has started raising the official interest rate and may keep raising it by 0.25 percentage points every month or so until, by the end of next year, it’s up to maybe 2.5 per cent (which, not by chance, is the mid-point of the Reserve’s 2 to 3 per cent inflation target).

Note that, if 2.5 per cent is roughly equal to the “neutral” interest rate - that is, the rate that’s neither expansionary nor restrictive – this would only involve withdrawing the “extraordinary monetary support” put in place to help us through the pandemic. It would take the Reserve’s foot off the accelerator, not jam on the brakes.

According to Lowe’s estimations, the resulting reduction in mortgagees’ disposable income, plus the likelihood that most workers’ wage rises wouldn’t be sufficient to cover the 5 per cent rise in their living costs, thus reducing their wages in real terms, would limit firms’ ability to raise their prices and so help to get the inflation rate back to the top of the 2 to 3 per cent target range by 2024.

The inflation problem fixed, without crashing the economy. Done at the expense of people with home loans and ordinary workers? Yep. No one said using interest rates to control the economy was particularly fair.

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Monday, May 2, 2022

Our inflation problem isn't a big one - unless we overreact

I can’t remember a time when the arguments of all those bank and business economists claiming “the inflation genie is well and truly out of the bottle” and demanding the Reserve Bank raise interest rates immediately and repeatedly have been so unconvincing.

At base, their problem is their unstated assumption that the era of globalisation means all the advanced economies have identical problems for the same reasons and at the same time.

If America has runaway inflation because successive presidents have applied budgetary stimulus worth a massive 25 per cent of gross domestic product at the same time as millions of workers have withdrawn from the workforce, Britain’s withdrawal from the European Union is causing havoc, and Europe’s problem is particularly acute because of its dependence on Russian oil and gas, we must be the same.

Business economists have put most of their energy into convincing themselves our problem is the same as everyone else’s, rather than thinking hard about how our circumstances differ from theirs and how that should affect the way we respond.

There’s also been a panicked response to a huge number – inflation of 5 per cent! – that says, “don’t think about what caused it, just act”. And since every other central bank has already started raising rates, what’s wrong with our stupid Reserve?

Too many economists have switched their brains to automatic pilot. We know from our experience of the 1970s and ’80s how inflationary episodes arise – from excessive demand and soaring wages – and we know the only answer is to jack up interest rates until you accidentally put the economy into recession. You have to get unemployment back up.

That stereotype doesn’t fit the peculiar circumstances behind this rise in prices, nor does it fit the way globalisation, skill-biased technological change, the deregulation of centralised wage-fixing and the huge decline in union membership have stripped employees of their former bargaining power.

The first thing to understand is that our price rises have come predominantly from shocks to supply: the various supply-chain disruptions caused by the pandemic, the war on Ukraine’s effect on oil and gas prices, and climate change’s effect on meat prices.

Various economists are arguing that price rises have been “broadly based” so as to show that price rises are now “demand-driven”, but the main reason so many prices have risen is that there have been so many different supply shocks coming at the same time, with so many indirect effects, ranging from transport costs to fertiliser and food.

Two thirds of the quarterly increase in prices came from four items. In order of effect on the index: cost of new dwellings (up 5.7 per cent), fuel prices (11 per cent), university fees (6.3 per cent) and food (2.8 per cent).

Of those, only new dwelling prices can be attributed mainly to strong demand, coming from the now-ended HomeBuilder stimulus measure. The rise in uni fees was a decision of the Morrison government.

America’s economy is “overheating”, but ours isn’t. It’s true our jobs market is very tight, and that much of this strength is owed to our now-discontinued stimulus measures.

But, paradoxically, the economics profession’s ideological commitment to growth by immigration has blinded it to the obvious: job vacancies are at record levels also because of another pandemic-related supply constraint: our economy has been closed to all imported labour (and we even sent a fair bit of it back home). This constraint has already been lifted.

The thing about supply shocks is that they’re once-only and not permanent. So, left to its own devices, without further shocks the rate of price increase should fall back over time. Petrol and diesel prices, for instance, have already fallen a bit but, in any case, won’t keep rising by 35 per cent a year year-after-year.

It’s sloppy thinking to think a rise in prices equals inflation. The public can be forgiven such a basic error, but professional economists can’t. A true inflation problem arises only when the rise in prices is generalised and is ongoing. That is, when it’s kept going by a wage-price spiral.

When a huge rise in prices, from whatever source, leads to an equally huge – or huger – rise in wages, which prompts a further round of price rises. That’s inflation.

In their panic, business economists have assumed that the loss of employee bargaining power we’ve observed in most of the years since the global financial crisis, which has done so much to confound the econocrats’ wage and growth forecasts, and caused inflation to fall short of the Reserve’s target range for six years in a row, has suddenly been transformed. Union militance is back!

Really? I’m sure employees and what remains of their unions will be asking for pay rises of at least 5 per cent this year, but how many will get anything like that much? They’ll all be on strike until they do, you reckon?

They’re safe to get more than the 2.3 per cent they got in the year to December, according to the wage price index, but the greatest likelihood is that real wages will continue to fall. And the cure for that is to raise interest rates, is it?

It is true that, if wages rose in line with prices, we would have an inflation problem, but how likely is that?

There’s been much concern about stopping a rise in “inflation expectations”, but this thinking involves a two-stage process: in expectation of higher inflation, businesses raise their prices. And in expectation of higher inflation, unions raise their wage demands.

All the sabre-rattling we’ve seen by the top retailers and their employer-equivalent of union bosses – so breathlessly reported by the media – suggests they’re increasingly confident they can get away with big price rises. But how much success individual employees and unionised workers have in realising their expectations remains to be seen.

Perhaps in this more inflation-conscious environment, employers will be a lot more generous – more caring and sharing – than they have been in the past decade. Perhaps.

The Reserve is under immense pressure from the financial markets, the bank and business economists, the media, the actions of other central banks and even the International Monetary Fund to start raising interest rates.

It will, with little delay. It must be seen to act. But whether it’s at panic stations with the media and the business economists is doubtful. And you don’t have to believe the inflation genie is out of the bottle to see that the need for interest rates to be at near-zero emergency levels has passed.

As BetaShares’ David Bassanese has predicted, the Reserve will be “not actively trying to slow the economy, but rather [will] begin the process of interest-rate normalisation now that the COVID emergency has passed”. Moving to “quantitative tightening” will be part of that process.

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Friday, April 29, 2022

The cost of living is soaring, but raising interest rates won't help

This week removed any doubt that the cost of living is the dominant issue in this election campaign. We got official confirmation that the many people complaining about rising prices are, to coin a phrase, right on the money.

Now the Reserve Bank is under immense pressure to begin increasing interest rates at its board meeting on Tuesday. If it does so, this will add to the cost pressures facing many consumers, making the cost of living an even bigger issue politically.

But were it to wait for the latest information on wages that it will get three days before the election – which it really ought to – then increase rates in early June, it will be accused of choosing its timing to help the Coalition. And rightly so.

As Reserve Bank governor Dr Philip Lowe’s predecessor, Glenn Stevens, argued convincingly when he increased the official interest rate just before the 2007 election, which saw John Howard thrown out of office, the only way for the Reserve to be apolitical is for it to do what it believes the economy needs without regard to what’s happening politically.

Speaking of politics, The Conversation’s Peter Martin has used the ABC’s Vote Compass – a questionnaire which, among other things, asks respondents to name the issue of most concern to them – to show that, at the 2016 election, only 3 per cent picked “cost of living”.

At the 2019 election, it was only 4 per cent. At this election, however, 13 per cent of voters have picked it, making it the respondents’ second biggest concern, behind only climate change. (Which should be biggest. But that’s for another day.)

After this week, it’s probably more than 13 per cent.

This week the Australian Bureau of Statistics released figures showing the consumer price index rose by 2.1 per cent during the three months to the end of March, and by 5.1 per cent over the year to March.

Strictly speaking, the CPI is a measure of consumer prices rather than the cost of living, but it’s near enough. So this “headline” figure is the right one for people concerned about living costs. It’s the highest annual rate for two decades.

But it can be affected by extreme prices changes that don’t represent the general price pressures on the economy, so “for policy purposes” (that is, for its decisions about changing the official interest rate) the Reserve focuses on a measure of “underlying” inflation called the “trimmed mean”.

This excludes the 15 per cent of prices that rose the most during the quarter and the 15 per cent of prices that rose the least or fell.

By this measure, prices rose by 1.4 per cent during the quarter and by 3.7 per cent over the year. This is the highest it’s been since 2009, and well above the Reserve’s 2 to 3 per cent target range.

It’s standard behaviour for incumbent politicians to claim the credit for anything good that happens in the economy during their term, regardless of whether they’re entitled to.

So it’s only rough justice for opposition politicians to blame the government for anything bad that happens – which is just what Labor’s been doing this week.

But Scott Morrison and Josh Frydenberg have been arguing furiously that the leap in most prices has had nothing to do with them. And I think there’s a lot of truth to their claim.

Let’s look at the particular prices that do most to explain the March quarter jump in living costs. The biggest was a 5.7 per cent rise in the cost of newly built houses and units.

This has been caused by shortages of certain imported building materials due to pandemic-related disruptions to supply, worsened by a surge in demand for new homes arising from the authorities’ efforts to counter the “coronacession” by cutting interest rates and using HomeBuilder grants to keep the building industry moving.

Next in importance in explaining the surging cost of living is an 11 per cent rise in the cost of petrol and diesel fuel, caused by Russia’s war on Ukraine. These prices are up 35 per cent over the year to March.

The higher world oil price has also raised fresh food prices by increasing the cost of fertiliser, as well as increasing the cost of transporting many goods. The pandemic has temporarily increased the cost of international shipping.

Third in importance this quarter is a 6.3 per cent increase in university fees caused by a federal government decision last year.

Add in the 12 per cent annual rise in beef and lamb prices caused by graziers’ restocking following the end of the drought and you see that most of the rise in living costs so far comes from factors far beyond the government’s control.

So, are Morrison and Frydenberg off the hook on rising living costs? No. People feel the pain of rising prices more acutely when their wage rises haven’t been keeping up, let alone getting ahead.

In a well-managed economy, workers’ wages rise a little faster than prices. This hasn’t been happening, particularly in the past two years or so, and the government has made no attempt to rectify the problem.

Raising interest rates can do nothing to fix all the problems we’ve noted on the supply-side of the economy. The only thing it can do is dampen the demand for goods and services by increasing the cost of borrowing and by leaving those people with mortgages with less disposable income to spend.

Which is an economist’s way of saying what everybody knows: that higher interest rates add to the living costs of the third of households paying off a home loan. Those who’ve taken on loans in recent years will feel it most.

Of course, all those people living off their savings will be cheering the return to rising interest rates. But from an economy-wide perspective, the winners are far outweighed by the losers.

Read more >>

Monday, February 28, 2022

Everyone else has an inflation problem, why can't we have one too?

I suspect we’re engaged in a strange exercise of trying to convince ourselves that we, like the Americans, Brits and Europeans, have a big problem with inflation. I fear that, if we try hard enough, we’ll succeed.

As the December quarter consumer price index shows, it’s true some prices have risen noticeably. The price of petrol has jumped and so have home building costs.

But, as our top econocrats have been reminding us, that’s not a big deal. The world price of oil has always gone up and down, for many reasons – none of which we have any ability to influence. Most other rises we’ve seen are temporary problems caused by the pandemic and governments’ response to it, as the supply of certain goods (but not services) falls short of demand. Computer chips, for instance.

And, as Reserve Bank governor Dr Philip Lowe demonstrated in his recent testimony to a parliamentary committee, our price rises are nothing like as big a deal as those in America, Britain and Europe, where there’s a lot more going on than just the passing effects of the pandemic.

Lowe noted that, over the past year, electricity and gas prices have risen by 25 per cent in the US and Europe, and even more in Britain, but by 2 per cent in Australia. Used car prices are up 40 per cent in the US, but nothing like that here.

People complain about rising rents but, as with mortgage interest rates, there’s a gap between advertised rates and what people actually pay. Actual rents have fallen in Sydney and Melbourne. And though everyone’s highly conscious of the jump in petrol prices, petrol accounts for only about 3 per cent of the cost of all the goods and services households buy.

The funny thing is, there are various groups in Australia that want to believe our problem’s as big as the other rich countries’. The key group is the financial markets. As Lowe said, “some in financial markets look at what’s going on in the United States and Europe and say, ‘They’ve got higher inflation, it’s coming to Australia’. They may be right” - he said before going on to explain why that was unlikely.

But so convinced are our financial markets that we’re just a carbon copy of the US economy that they’re laying bets the Reserve will be forced to start whacking up interest rates within a few months and will go hell for leather for the rest of the year.

The media have been happy to report this speculation as though it’s pretty much set in stone. “Inflation on the rise” is a good story and “rates to rise” even better.

As for the public, it’s kinda pleased to be told inflation’s a big problem, not because it likes rising prices, but because it confirms what people have always believed: that keeping up with “the cost of living” is always a struggle.

If you run a bit short before pay day, this is incontrovertible proof that prices are rising rapidly. The notion that the problem may be inadequate pay rises never seems to occur.

The CPI people carry in their heads always gets much bigger increases that the one calculated by the Bureau of Statistics because ordinary mortals’ memory of price rises is always stronger than their memory of price falls. And it never occurs to them to include in their sums all the many prices that didn’t change.

Which means, I fear, there’s a big risk that all the talk of inflation and rising prices – and all the media stories of a rise in this or that price; stories that multiply when “inflation” becomes the flavour of the month - could become a self-fulfilling prophecy.

To see this, you need to remember where we’ve come from: eight years of surprisingly weak growth in wages and six years of the (officially-calculated) inflation rate being below 2 per cent.

For much of that time, Lowe – whose scrutiny of statistics is supplemented by having his “liaison” people speak to more than 100 key businesses a month – has explained the weakness in wage and price inflation as arising from a strong “cost-control mentality” among Australian businesses.

Lowe explains that many businesses – retailing in particular – have been through a period of intense competition. There’s the threat from “category killers” such as Bunnings and Officeworks, the decline of department stores, Aldi taking on Coles and Woolies, and the move to online shopping, which has opened access to overseas competitors and made price more “salient” in decisions to buy things.

This increased competition came at a time when retail demand hasn’t been particularly strong (thanks mainly to weak wage growth). Special sales and other forms of discounting have been widespread.

In these circumstances, firms have been most reluctant to raise prices. Rises in purchase costs that may not last have been absorbed rather than passed on. Instead, firms have become obsessed with controlling their costs – including, and in particular, their labour costs.

In their book Radical Uncertainty, British economists John Kay and Mervyn King argue there’s no such thing as a profit-maximising firm. It’s not that firms wouldn’t like to earn maximum profits, it’s that they don’t know where that point is.

In real life, there’s no diagram or equation you can look up to tell you. You know there is a “price point” beyond which you’ll lose more in sales than you gain from the price increase, but you don’t know where it is. In real life, you have to feel your way, reading the signs and making sure you don’t push it too hard.

See where I’m going? We’re coming from a period where price rises have been heavily constrained for a long time. Not big, not many. “I haven’t been game to raise my prices because none of my competitors have been been either.”

Suddenly, however, everyone’s talking about inflation and every day the media are reporting that this price is rising and that price is going up. It’s obvious prices everywhere are taking off.

“One of my competitors has moved, so I can too. There’s always some cost increase I can point to. In this environment, I won’t get much push-back from customers. The media’s been softening them up.”

Can we talk ourselves into having a real inflation problem like the other rich countries? We’ll find out whether prices can be raised by imagination alone.

I fear, however, that getting those higher prices passed through to bigger wage rises will be a taller order. And, if that doesn’t happen, we’ll get no ongoing increase in the inflation rate, just a worsening in the cost of living.

Read more >>

Friday, February 4, 2022

The news on the economy is better than we're being told

From the way the financial markets – and an easily-led media – are telling the story, our troubles have multiplied. Along with all our other worries, Australia now has a big new problem: inflation is back with a bang. But that’s not the way Reserve Bank governor Dr Philip Lowe told the story this week. He thinks we’re going great guns.

According to the markets, recent figures show we’ve caught America’s disease and inflation has taken off. Something must be done urgently to stop the rot and, just as the US Federal Reserve is about to start raising interest rates to get prices back under control, we’ll have no choice but to follow within a month or two.

The bets the financial markets are making about imminent rate rises imply that most of us will be getting big pay rises this year – which I’ll believe when I see it. But if that did happen it would be the first decent pay rise most workers had received in almost a decade. This, apparently, would be very bad news. Really?

In marked contrast, Lowe thinks everything in the economy’s got better, not worse. Right now, he said in a speech this week, “we are closer to full employment and achieving the inflation target than we had anticipated”. Gosh. That bad, eh?

This time last year, the Reserve was expecting the economy - real gross domestic product - to grow by 3.5 per cent last year. Now it’s expected to have grown by 5 per cent. The rate of unemployment was expected to be 6 per cent. Turned out to be 4.2 per cent. Wages were expected to grow by only 1.5 per cent. Now it’s likely to have been 2.25 per cent.

The story in the jobs market does much to explain Lowe’s high spirits. “Australia is within sight of a historic milestone – having the national unemployment rate below 4 per cent” for the first time since the early 1970s.

“This is important because low unemployment brings with it very real economic and social benefits for many Australians and their communities. Full employment is one of the Reserve Bank’s legislated objectives and [its] board is committed to playing its role in achieving that objective, consistent with also achieving the inflation target,” Lowe said.

Already, our unemployment rate is at its lowest in 13 years, along with our rate of underemployment.

Unemployment has also fallen in America and Britain, but whereas in their cases this is partly because a lot of workers have stopped looking for jobs and left the labour force, in our case labour force “participation” is almost as high as it’s ever been.

So why all the market and media gloom and doom? Because the rate of inflation was expected to be a below-target 1.5 per cent by the end of last year, but has jumped to 3.5 per cent.

The market thinks that higher inflation leads immediately to higher interest rates, and the media think higher rates are bad news because all their customers are borrowers and none are savers.

But the news on inflation – and the prospects for more of it – ain’t as bad as they sound, for several reasons.

First, if we really do have an inflation problem, it’s not nearly as great as America’s. The Yanks’ rate is 7 per cent, the Brits’ is 5.4 per cent and the Kiwis’ 5.9 per cent. Even in a globalised world, each economy’s story is different.

Second, it’s not as though most prices in Australia have grown by 3.5 per cent. Much of the jump to 3.5 per cent is explained by big rises in the prices of petrol and home-building. The world price of oil goes up and down over the years. Nothing we did in Australia caused the latest increase, and nothing we could do would have any influence on whether it keeps going up or goes back down a bit.

Other price increases are explained by the effect of the on-again, off-again waves of the virus in causing mismatches between the supply and demand for various goods – mismatches which are unlikely to last very long.

This explains why the Reserve uses a less volatile measure of “underlying” inflation to judge how inflation is going relative to the target of keeping annual inflation between 2 and 3 per cent, on average over time.

Its preferred measure of underlying inflation is running at 2.6 per cent, not the “headline” rate of 3.5 per cent, and 2.6 per cent is close to the middle of the target. So, no cause for concern - unless you have strong reasons to believe it’s rapidly heading up out of the target range.

Third, with this being the first time in six years that underlying inflation’s been high enough to reach the target zone, Lowe’s made it clear he won’t start raising the official interest rate until he’s convinced the return to target is “sustained”.

He made the obvious (but often forgotten) arithmetic point that, for inflation to be sustained at current rates, the prices of many goods would have to keep increasing at their recent rates, not just settle at higher levels.

When we’re talking about petrol prices and virus-caused mismatches between supply and demand, this seems unlikely. That is, there’s a good chance we’ll see a fall rather than a rise in the quarterly inflation rate.

Another basic point. One-off price increases only become part of the ongoing rate of inflation if they flow on to wages – that is, if they add to the “wage-price spiral”.

In the days when we really did have a serious inflation problem, that flow-through could be taken for granted. But over the past seven years, the link between rising prices and rising wages has become much less certain.

That’s why I’ll believe we’re all in for 3 per cent pay rises when I see it. And the man with his hand on the interest-rate lever is saying the same thing.

Read more >>

Wednesday, December 9, 2020

We're having trouble learning to live without inflation

When I became an economic journalist in the early 1970s, the big economic problem was high and rising inflation. The rate of increase in consumer prices briefly touched 17 per cent a year under the Whitlam government, and averaged about 10 per cent a year throughout the decade.

It never crossed my mind then that one day the rise in prices would slow to a trickle – they rose by 0.7 per cent over the year to September – and I certainly never imagined that, if it ever did happen, people would have so much trouble living in a largely inflation-free world.

What? Why would anyone ever object to prices rising at a snail’s pace? Well, of course, no one does. Nor do you see many borrowers objecting to a fall in interest rates.

For savers, however, it’s a different story. Last month, when Reserve Bank governor Dr Philip Lowe announced what’s likely to be the last of many cuts in the official interest rate – it’s a bit hard to go lower than 0.1 per cent – there were bitter complaints from the retired.

“How do you expect us to live when you keep cutting the interest we get on our investments? How long are you going to keep screwing us down like this? When will you take the pressure off and start putting rates back up where they should be?”

Short answer to that last question: unless you’re only newly retired, probably not in your lifetime.

There’s something I need to explain. People like me may have given you the impression that our Reserve Bank moves interest rates up and down as it sees fit, cutting rates when the economy’s weak and it wants to encourage people to borrow and spend, or raising rates when the economy’s “overheating” and it wants to discourage borrowing and spending.

That’s true, but it’s not the whole truth. The deeper truth is that interest rates are closely related to the inflation rate. That’s because much of the rate of interest lenders require borrowers to pay them represents the compensation the lender needs to be paid just for the loss of purchasing power their money will suffer before it’s repaid.

(And when I talk about the lender, I mean the ultimate lender – ordinary savers – not the bank, which is just an intermediary standing between the ultimate lender and the ultimate borrower, probably someone with a home loan.)

So when the expected inflation rate is high, interest rates are high; when the expected inflation rate is low, so are interest rates. The other component of the interest payment lenders receive – the “real” interest rate – represents the actual fee the borrower pays for the temporary use of the lender’s money.

It’s only this much smaller real interest rate that the Reserve Bank is free to adjust up and down. So the main reason interest rates are so low and getting lower is that the inflation rate is low and getting lower.

And that’s not because of the pandemic and the recession it induced, so it won’t be going away when the economy recovers. It’s because, after rising steadily for about 30 years after World War II, the inflation rate in Australia – and all other advanced economies – has spent the past 30 years steadily going back down.

So inflation has gone away as a problem – leaving unemployment and underemployment as our dominant worry – and, as far as anyone can tell, it won’t be coming back for a long, long time.

If so, interest rates will be staying low, and it’s pointless to rail against the Reserve Bank. Rather, people reliant on their retirement savings will just have to adjust to a changed world.

If they want the safety of a bank term deposit, they’ll have to accept the tiny interest payment that goes with it. If that’s not enough, they’ll have to accept the greater risk and volatility that goes with share and other investments.

But let’s not exaggerate their predicament. If interest rates are low because inflation is low, that means their cost of living is low.

Indeed, the Australian Bureau of Statistics’ living cost index designed to measure the special circumstances of self-funded retirees shows their cost of living rose by just 0.7 per cent over the year to September.

Many self-described self-funded retirees take the view that their annual earnings from their superannuation should be sufficient for them to live on, thus leaving what they regard as the “principal” to cover future contingencies or be left to their children.

But, particularly for super payouts large enough to put retirees beyond being eligible for the age pension, it’s wrong to think of that payout as consisting of all your contributions (principal) plus interest. Well over half that sum consists not of your hard-earned, but of the government’s munificence in granting you 30 or 40 years of compounded tax concessions on both your contributions and your annual earnings.

Its generosity was intended to leave you with a sum sufficient to let you live comfortably in retirement, not to set up your kids’ inheritance. Trying to live without dipping into your payout isn’t a sign you’re doing it tough, it’s a lifestyle choice.

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Friday, October 30, 2020

How inflation became a big problem, but has disappeared

Treasury Secretary Dr Steven Kennedy observed this week that there’s been “a fundamental shift in the macro-economic underpinnings of the global and domestic economies, the cause of which is still not fully understood”. He’s right. And he’s the first of our top econocrats to say it. But he didn’t elaborate.

This week we got further evidence of that fundamental shift. The Australian Bureau of Statistics’ consumer price index for the September quarter showed an annual “headline” inflation rate of 0.7 per cent and an “underlying” (that is, more reliable) rate of 1.2 per cent.

This is exceptionally low and is clearly affected by the coronacession, as you’d expect. But there’s more going on than just a recession. Since 1993, our inflation target has been for annual inflation to average 2 to 3 per cent. For the six years before the virus, however, it averaged 1.6 per cent. And most other rich countries have also been undershooting their targets.

So, part of the “fundamental shift” in the factors underpinning the global economy is that inflation has gone away as a significant problem. But why? As Kennedy says, these things are “still not fully understood”. Some economists are advancing explanatory theories, which the other economists are debating.

Former Reserve Bank governor Ian Macfarlane, who has form for being the first to spot what’s happening, offered his own explanation of the rise and fall of inflation in a recent Jolly Swagman podcast.

Macfarlane says that, though every developed economy’s experience is different, they’re all quite similar. If you stand well back and look at the rich countries’ experience over the past 60 years, he says it’s not too great a simplification to say that two phases stand out: inflation rose in the first phase to reach a peak in the mid-1970s to early 1980s, but then fell almost continuously until we reached the present situation where it’s below the targets set by central banks.

In our case, we had double-digit inflation in the ’70s and rates of 5 to 7 per cent in the ’80s, then a long period within the target range until about six years ago. Since then it’s been below the target “despite the most expansionary monetary policy [the lowest interest rates] anyone can remember”.

So how is this experience of roughly 30 years of rising inflation, then 30 years of falling inflation explained? Macfarlane thinks there are about half a dozen reasons for the worsening of inflation in Australia.

For a start, the growth of production and employment during the 30-year post-war Golden Age was stronger than any period before or since. We had high levels of protection against imports, with little or no competition from developing countries.

We had a strong union movement, confident that in pushing for higher wages it wasn’t jeopardising workers’ job prospects. We had a centralised system for setting wages, with widespread indexation of wages to the consumer price index.

Our businesses took a “cost-plus” approach to their prices. If wages or the cost of imported components rose, this could be passed on to customers, confident your competitors would be doing the same. That is, firms had “pricing power”.

Finally, businesses’, unions’ and consumers’ expectations about how fast prices would rise in future were quite low at the start of the period, but they picked up and, by the end, had become entrenched at a high rate.

“This macro-economic environment was clearly conducive to rising inflation, and it took one policy error to push it over the limit,” Macfarlane says.

Under the McMahon government – predecessor of the Whitlam government – fiscal policy was made expansionary even though the inflation rate was already 7 per cent. Monetary policy was eased, with interest rates remaining below the inflation rate. And the centralised wage-fixing system awarded 6 or 9 per cent pay rises.

So, that’s how we acquired an inflation problem. What changed in the second 30-year period of declining inflation? Macfarlane thinks “the defining feature of the later period was that, in the long struggle between capital and labour, the interests of capital took precedence over those of labour”.

That is, the bargaining power of labour collapsed. In most countries the labour share of gross domestic product has declined, with the profits share increasing. Wage growth has been restrained, union membership has shrunk and the inequality of income and wealth has increased.

“These features have been most pronounced in the US, but many other countries, including Australia, have shown most of the same signs,” he says.

Two main developments account for this change. First, globalisation. The rapid growth of manufactured exports from China and the developing world pushed down consumer prices. More importantly, businesses and workers in the rich world realised that firms or whole industries could be shifted to countries where wages were lower.

Businesses had lost pricing power and sought to maintain profits by cutting costs and reducing staff levels. Union members became more concerned with saving their jobs than pushing for higher wages.

Second, labour-saving technological advance. In manufacturing, sophisticated machines started replacing workers. In the much bigger services sector, advances in information and communications meant that armies of state managers, regional managers and other middle management were no longer needed. Clerical processes were automated. Call centres were cheaper than a network of offices. Customers could buy on the internet, without the need for shop assistants.

As the period of high inflation passed into distant memory, Macfarlane says, inflationary expectations fell. Inflation expectations – whose importance comes because they tend to be self-fulfilling – change very slowly. It took decades for them to rise in the earlier period and, now, after nearly three decades of moderate and low inflation, it will take a long time before higher inflationary expectations are rekindled.

I see much truth in Macfarlane’s explanation. But it certainly means there’s been a “fundamental shift” in the factors bearing down on the economy – the implications of which we’re yet to fully realise, let alone fix.

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Monday, August 3, 2020

Weak inflation tells us: it's the demand side, stupid

Despite the remarkable 1.9 per cent fall in the consumer price index in the June quarter, we face no imminent threat of deflation. But it’s not as improbable a fate as it used to be.

Apart from in headlines, one negative quarter does not deflation make. Deflation occurs when price falls are modest, widespread and continuous, the product of chronically weak consumer demand. Businesses cut their prices as the only way to get people to buy what they’ve produced. Their goal is not to make a profit, but to reduce their losses.

Paradoxically, deflation – which was dogging Japan not so many years ago – is to be feared. Why buy now if prices are falling? Why not wait until they’re even lower? But the longer consumers wait, the more prices fall. And the faster they fall, the more businesses cut production and lay off workers. The economy implodes.

By contrast, our fall was produced by cuts in two key government-controlled prices – for childcare and pre-schools – plus petrol prices. We already know these falls will largely be reversed in the present quarter.

Even so, all the other prices in the CPI basket of goods and services rose during the quarter by just 0.1 per cent. People are reluctant to buy during recessions, so businesses don’t raise their prices for fear of selling even less. It’s a safe bet inflation will stay negligible for as long as the recession lasts and for as long as it takes the economy to recover.

Trouble is, we had unduly weak price growth long before the coronasession. Our rate of inflation’s been below the bottom of the 2 to 3 per cent target range for almost six years. The Reserve Bank has been struggling to get it up into the target, "Goldilocks" range without success.

Point is, when you have a problem with high inflation, you have a problem with the supply side of the economy. Supply isn’t keeping up with demand, so something needs to be done to get the economy’s production growing faster and more efficiently.

Conversely, when inflation isn’t a problem but high unemployment is, you have a problem with demand side of the economy. Consumers aren’t spending enough and businesses aren’t investing enough.

But too-low inflation isn’t the only indicator that demand and supply are out of whack. Another sign is record low interest rates. They’re low not just because inflation is so low, but also because “real” interest rates – the lenders’ above-inflation reward for letting other people use their money – have also fallen.

Why? It can only be because the amount of money savers have available to lend (the “supply of funds”) exceeds the amount home-buyers, businesses and governments want to borrow to cover their investment spending (the “demand for funds”). That real interest rates have been falling for years is another sign that our problem is chronic deficient demand, not inadequate supply.

One consequence of this is that the authorities’ ability to encourage borrowing and spending by cutting interest rates has been exhausted. So “monetary policy” has done its dash, leaving “fiscal policy” – the budget – as the only instrument left for the government to use to support the economy during the recession and then to stimulate growth.

If it wants more spending in the economy, the government must do it itself.

There’s just one difficulty. During the period in the 1970s and ‘80s when it was clear the developed economies had a major problem with inflation – meaning the supply side was chronically unable to keep up – the conventional wisdom emerged that the short-term management of the economy should be left to monetary policy, with fiscal policy reserved to help with other, medium-term issues.

This approach fitted neatly with the conservative side of politics’ preference for Smaller Government. Our Liberals have come to view macro-economic management in largely party-political terms: we use monetary policy; Labor uses fiscal policy. We follow neo-classical economics; Labor follows Keynesian economics. We cut government spending and taxation; Labor loves to spend and tax. We worry about deficient supply; Labor worries about deficient demand.

This political ideology approach to macro management can’t cope with the developed economies’ tendency to switch from long periods when supply and inflation are the big problem to long periods when demand and unemployment are the big problem.

You can see this in the Morrison government’s obvious reluctance to spend enough to limit the economy’s contraction to two successive quarters, despite our continuing struggle to contain the virus. You see it in Morrison’s desire to move on to “reforms” aimed at improving the supply side.

Both political sides see that wage growth is too weak at least partly because the productivity of labour is improving only slowly. But the Liberals’ ideological approach to macro tells them the answer to low productivity is more supply-side reform, whereas a pragmatic, more contemporary analysis says it seems obvious that if consumer demand is weak, business investment will be weak and if business investment in the latest technology is weak it’s no surprise that productivity improvement is slow. It’s the demand side, stupid.
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Saturday, February 22, 2020

No progress on wages, but we’re getting a better handle on why

In days of yore, workers used to say: another day, another dollar. These days they’d be more inclined to say: another quarter, another sign that wages are stuck in the slow lane. But why is wage growth so weak? This week we got some clues from the Productivity Commission.

We also learnt from the Australian Bureau of Statistics that, as measured by the wage price index, wages rose by 0.5 per cent in the three months to the end of December, and by just 2.2 per cent over the year - pretty much the same rate as for the past two years.

It compares with the rise in consumer prices over the year of just 1.8 per cent. If prices aren’t rising by much, it’s hardly surprising that wages aren’t either. But we got used to wages growing by a percentage point or so per year faster than consumer prices and, as you see, last year they grew only 0.4 percentage points faster.

It’s this weak “real” wage growth that’s puzzling and worrying economists and p---ing off workers. Real wages have been weak for six or seven years.

So why has real wage growth been so much slower than we were used to until 2012-13? Various people, with various axes to grind, have offered rival explanations – none of which they’ve been able to prove.

One argument is that real wage growth is weak for the simple and obvious reason that the annual improvement in the productivity of labour (output of goods and services per hour worked) has also been weak.

It’s true that labour productivity has been improving at a much slower annual rate in recent years. It’s true, too, that there’s long been a strong medium-term correlation between the rate of real wage growth and the rate of labour productivity improvement.

When the two grow at pretty much the same rate, workers gain their share of the benefits from their greater productivity, and do so without causing higher inflation. But this hasn’t seemed adequate to fully explain the problem.

Another explanation the Reserve Bank has fallen back on as its forecasts of stronger wage growth have failed to come to pass is that there’s a lot of spare capacity in the labour market (high unemployment and underemployment) which has allowed employers to hire all the workers they’ve needed without having to bid up wages. Obviously true, but never been a problem at other times of less-than-full employment.

For their part, the unions are in no doubt why wage growth has been weak: the labour market "reforms" of the Howard government have weakened the workers’ ability to bargain for decent pay rises, including by reducing access to enterprise bargaining.

But this week the Productivity Commission included in its regular update on our productivity performance a purely numerical analysis of the reasons real wage growth has been weak since 2012-13. It compared the strong growth in real wages in the economy’s “market sector” (16 of the economy’s 19 industries, excluding public administration, education and training, and health care and social assistance) during the 18 years to 2012-13 with the weak growth over the following six years.

The study found that about half the slowdown in real wage growth could be explained by the slower rate of improvement in labour productivity. Turns out the weaker productivity performance was fully explained by just three industries: manufacturing (half), agriculture and utilities (about a quarter each).

A further quarter of the slowdown in real wage growth is explained by the effects and after-effects of the resources boom. Although the economists’ conventional wisdom says real wages should grow in line with the productivity of labour, this implicitly assumes the country’s “terms of trade” (the prices we get for our exports relative to the prices we pay for our imports) are unchanged.

But, being a major exporter of rural and mineral commodities, that assumption often doesn’t hold for Australia. The resources boom that ran for a decade from about 2003 saw a huge increase in the prices we got for our exports of coal and iron ore. This, in turn, pushed the value of our dollar up to a peak of about $US1.10, which made our imports of goods and services (including overseas holidays) much cheaper.

This, of course, was reflected in the consumer price index. When you use these “consumer prices” to measure the growth in workers’ real wages before 2012-13, you find they grew by a lot more than justified by the improvement in productivity.

In the period after 2012-13, however, export prices fell back a fair way and so did the dollar, making imported goods and services harder for consumers to afford. So there’s been a sort of correction in which real wages have grown by less than the improvement in labour productivity would have suggested they should. Some good news: this is a one-time correction that shouldn’t continue.

Finally, the study finds that a further fifth of the slowdown in real wage growth is explained by an increase in the profits share of national income and thus an equivalent decline in the wages share.

Almost three-quarters of the increase in the profits share is also explained by the resources boom. It involved a massive injection of financial capital (mainly by big foreign mining companies, such as BHP) to hugely increase the size of our mining industry – which, as the central Queenslanders lusting after Adani will one day find out, uses a lot of big machines and very few workers. Naturally, the suppliers of that capital expect a return on their investment.

But harder to explain and defend is the study’s finding that more than a quarter of the increase in the profits share is accounted for by the greater profitability of the finance and insurance sector. Think greedy bankers, but also the ever-growing pile of compulsory superannuation money and the anonymous army of financial-types who find ways to take an annual bite out of your savings.
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Monday, December 23, 2019

Living in the post-inflation era turns out to be no fun

It’s Christmas shopping time, when the bills mount up and your money never goes far enough. So how come people are saying the inflation rate should be higher? I thought inflation was meant to be a bad thing?

It’s a good question when one of those people is Reserve Bank governor Dr Philip Lowe. He keeps saying we need to get unemployment lower and inflation back up into the 2 to 3 per cent target range. (At last count the annual rate of increase in consumer prices was "only" 1.7 per cent. I can remember when, for a brief period in the 1970s, it was 17 per cent.)

The short answer is that Lowe doesn’t see higher prices as a good thing in themselves. Rather, he sees them as a means to an end. Or better, as a symptom or by-product of something that is a good thing.

Why do prices rise? Because the demand for goods and services – the desire to purchase them – is growing faster than the supply of them – our businesses’ ability to produce them. So the rate of price inflation is a symptom or sign of strong demand.

And strong demand for goods and services is a good thing because it means the economy is growing and so is employers’ need for workers to help produce more goods and services. Employment increases and unemployment falls.

So Lowe wants to see higher prices simply because they’re a means to the end of lower unemployment. What’s more, increased employer demand for labour relative to its supply makes labour – particularly skilled labour – scarcer and so puts upward pressure on its price, otherwise known as wages.

And, as he’s often said, Lowe would like to see employers paying higher wages than they are, because consumer spending – consumer demand – is so weak at present mainly because wages are hardly growing faster than consumer prices, and real wages are the main thing that drives consumer spending.

All that make sense? Good – because now I’ll give you the more complicated answer. Surely, although strong demand is good for the economy, it would be better if supply was just as strong, meaning we could have growth in jobs and living standards without any inflation?

That makes sense in principle, but not in practice. The managers of the macro economy believe we need some inflation, though not too much. For two reasons. First, though you’ll find this hard to credit, economists are sure our consumer price index (like other countries’ CPIs) overstates inflation.

That’s because the official statisticians are unable to pick up all the cases where prices rise not simply because the firm’s costs have risen, but because the quality of the product has been improved. If so, aiming for a measured inflation rate of zero would require you to crunch the economy hard enough to make actual inflation less than zero – that is, prices would be falling.

The second reason is that sometimes, when the economy is growing too strongly, wages rise too much, prompting firms to lay off workers. Trouble is, workers hate having their wages cut. But if you’ve got a bit of inflation in the system, you can cut wages in real terms simply by skipping an annual pay rise, which workers find less unpalatable.

When the Reserve Bank set its target for inflation in the early 1990s, it settled on 2 to 3 per cent a year ("on average over the medium term"). It thought such a range would overcome both problems and insisted such a target range constituted "practical price stability".

But things in our economy and all the advanced economies have changed a lot since the 1990s. Demand has been chronically weak relative to supply since the global financial crisis and, in consequence, inflation rates have been below-target everywhere.

Some people have suggested we move to a lower, more realistic target range, but Lowe has resisted, arguing that to do so would lower firms’ and workers’ expectations about inflation, making our weak-demand problem even worse. He may be right.

But now try this thought. Inflation is 1.7 per a year, while wages are growing by 2.2 per cent and workers aren’t at all happy. I’ve had several top economists agree with my contention that, if we could wave a magic wand and raise both inflation and wages by, say, 2 percentage points, so that wages were growing by 4.2 per cent, workers would be a lot less discontented.

Why? Because of a phenomenon that economists used to talk about a lot in in the 1960s, but rarely mention today, called "money illusion". People who aren’t economists keep forgetting to allow for inflation. If so, the era of very low inflation isn’t proving to be much fun.
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Monday, August 26, 2019

Why government-controlled prices are soaring

As if Scott Morrison didn’t have enough problems on his plate, we learnt last week that government-administered prices are rising much faster than prices charged by the private sector.

Last week my colleague Shane Wright dug out figures from the bowels of the consumer price index showing that, over the almost six years since the election of the Abbott government in September 2013, the prices of all the goods and services in the CPI basket have risen by just 10.4 per cent, whereas the government-administered prices in the basket rose by 26 per cent.

Some of those "administered" prices actually fell and others rose by less than prices overall. But let’s do what everyone does and focus on the really big increases.

Behavioural economics tell us that people’s perceptions of the cost of living are exaggerated by a ubiquitous mental shortcut psychologists call "salience". We tend to remember the things that leapt out at us at the time and forget all the things that didn’t.

So, for instance, we vividly remember the shock we got when we opened our electricity bill and saw how huge it was and how much it had increased.

In round figures, the cost of secondary education rose by 30 per cent over the period, childcare by 27 per cent, postal costs by 27 per cent, hospital and medical services by 36 per cent, council rates by 21 per cent, cigarettes by 109 per cent, gas prices by 16 per cent and electricity by 12 per cent (most of the bigger increase came during the term of the previous Labor government).

Not hard to see that the government has a huge salience problem. Plenty of scope there for the punters to convince themselves the cost of living is soaring.

But what should Morrison do? At a glance, the problem's obvious: government prices rising much faster than market prices say governments are hopelessly wasteful and inefficient. So expose the government to competition and the waste will be competed away, to the benefit of all.

Sorry, the true story’s much more complicated. Indeed, part of the problem is the backfiring of governments’ earlier attempts to make the provision of government services "contestable".

Let’s look deeper. For a start, some of the increase in administered "prices" is actually increases in taxation. The doubling in cigarette prices is the result of the phased massive increase in tobacco excise begun by Malcolm Turnbull.

Local council rates work by applying a certain rate of tax to the unimproved land value of properties. State governments usually cap the extent to which the tax rate can be increased, but the base to which it’s applied soars every time there’s a housing boom.

Postal costs rise because we want to continue being able to post letters to anywhere in Australia at a uniform price, even though we're actually doing it less and less, thus sending economies of scale into reverse. Australia Post would have been privatised long ago if any business thought it could make a profit from the business without scrapping the letter service.

The doubling in the retail prices of the now largely privatised (but still heavily regulated) electricity industry over the past decade is the classic demonstration that attempts to introduce competition to monopoly industries are no simple matter and can easily backfire.

The cost of childcare has been rising over the years because governments have been raising quality standards – staff-child ratios, better educated and paid workers. Is that bad? This formerly community-owned sector has long been open to competition from for-profit providers without this showing any sign of helping to limit price increases.

Even so, childcare is heavily subsidised by the federal government. This government’s more generous subsidy scheme caused the net out-of-pocket cost to parents (which is what the CPI measures) to fall a little last financial year.

The modest suggested fees in government schools wouldn't have risen much over the past six years. If private school fees have risen strongly despite the heavy taxpayer subsidies going to Catholic and independent schools, it’s because the number of parents willing to pay them shows little sign of diminishing. Hardly the government’s problem.

Detailed figures show that the out-of-pocket costs for pharmaceuticals rose by less than 6 per cent (thanks to reforms in the pharmaceutical benefits scheme) and for therapeutic goods fell a few per cent, while for dental services they kept pace with the overall CPI, leaving the out-of-pocket costs of hospital and medical services up by a cool 36 per cent.

That tells you private health insurance is falling apart. Add the continuing problems with needs-based funding of schools, and electricity and gas prices, and the scope for further efficiency improvements in healthcare, and you see the Morrison government has plenty to be going on with.
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