The low inflation environment in Australia continued through to the end of 2012 with the consumer price index rising a paltry 0.2 per cent in the quarter and 2.2 per cent through the year.

As any decent and fair economist would suggest, low inflation is the best way to improve purchasing power for wages earners and also to help those in retirement relying on interest and other income. If the general price level is rising at a moderate or low pace, workers don’t need larger wage rises to maintain or increase living standards and retirees don’t need high interest rates to maintain or build their cash flow relative to price increases.

Yesterday’s inflation news is remarkable in terms of what it means for real wages growth and cost of living issues. The 2.2 per cent annual inflation rate is the tenth lowest inflation reading in the last 50 quarters with prices for a range of goods and services actually falling with large price increases confined to a few high profile areas.

The inflation result also validates the low interest rate environment and depending on the global, market and domestic economic indicators, gives the RBA scope to cut interest rates again. That said, the global economic and market news is so positive at the moment that the RBA is unlikely to cut interest rates even though inflation is dead in the water.

Indeed, stock markets rose further overnight extending the bull market evidence since the middle of 2012. This is another sign of rising global confidence in the economic outlook, a point that is likely to dissuade the RBA from cutting interest rates further.

But back to yesterday’s inflation data.

There is a fantastic smorgasbord of information in the consumer price index database which outlines exactly where the average Australian household spends their money.

The debate over the carbon tax has been furious given there have been sharp increases in electricity prices since carbon has had a price. In the past year, electricity prices have risen 17.7 per cent of which about 10 per cent was due to carbon. This is a big rise. That said, the household expenditure weights used by the Australian Bureau of Statistics show that electricity accounts for just 2.5 per cent of the average household expenditure on the basket of goods and services that make up the CPI.

Electricity is, therefore, a small part of the average household budget.

In terms of some comparisons for where an average household spends its money, purchases of tobacco make up 2.5 per cent of average household consumption, the same as electricity. Spending on meals out and take away foods accounts for 5.5 per cent; alcohol 4.8 per cent; rent 6.9 per cent; petrol 3.5 per cent and holidays and accommodation 4.9 per cent.

These spending patterns show just how insignificant electricity is in the scheme of the average household budget, even though it has been the item whose prices has risen the most over the past year.

Think about it. The average household spends as much on tobacco as electricity and spends more than twice that amount on takeaway food and restaurant meals. It seems that the debate about electricity prices is potent because consumers get a big bill each quarter for their electricity using and a price hike is noticeable, whereas weekly spending on a packet of cigarette, a bottle of wine or some takeaway beef and black bean involves a series of small purchases through the course of a three month period and the actual amount spent is frequent, but relatively small.

This is where there may be some who claim "the numbers are wrong, I don’t smoke”. This is wrong in terms of what the CPI is measuring. Less than 10 per cent of households buy a new car each year, but car prices are a vital component of any measure of inflation. The CPI weights are based on the household expenditure survey and are set according to what an average household spends. While only about one-third of the population pay rent, it has a high weight in the CPI basket, as it should, because the inflation data are representative of the average household.

There were some other little gems from the inflation data base. In the past year, food prices rose just 0.3 per cent with lamb and goat prices actually falling 12.4 per cent and fruit prices were 19.0 per cent lower. At the same time, clothing prices fell a further 1.3 per cent, furniture prices were 1.6 per cent lower; car prices fell 1.2 per cent while audio, visual and computing equipment fell 14.2 per cent.

And despite the hype and what is often hysterical chatter about dwelling rent, it rose a moderate 3.7 per cent over the past year, a little above the overall level of inflation, but this is the same sort of increase as wages over the same time frame. Rents really aren’t a problem – it may just be that people are looking in the wrong (that is expensive) suburbs.

It is often enlightening to look at data and facts when making statements about the economy and issues such as cost of living pressures.

Yesterday’s inflation report should smash the myth that people are doing it tough given it clocked up an eleventh consecutive year where wages growth has exceeded the inflation rate. It should also help put context on the electricity price debate because it simply is not that big a deal.

More from Business Spectator

Comments on this article

Comments Policy
Anonymous,

Stephen you have just stated that the figures you are using are averages created by zombie statisticians for a weighting a conceptual basket (and are not real in application to actual people) and then you make broad sweeping statements that they determine the reality for lots of real people (CPI dispels the 'Aussie battler' myth, January 24)... Try $2.5k per annum at 2.5% (sorry I know thats a bit of a real scenario...) so the average house spends $100k per year.....
The real problem is its thinking like that that gets away with running this country (and too many countries) at present.

Anonymous,

I saw a graph recently of average electricity prices in several western countries over the last 10 years. In 2007 Australia's prices were comparable to those in the US. Since then they have roughly doubled relative to the US prices (CPI dispels the 'Aussie battler' myth, January 24).
More great management from the ALP.
Malcolm McKellar is correct. Inflation is much higher than the official 2-3% p.a. over the last five years. The official CPI is about as much use as any official economic statistics coming out of China and the financial press has the nerve to stand up and keep telling us bare faced lies.

Anonymous,

Low inflation is caused by low demand with higher jobless and a fear of spending. This caused by an underperfoming economy. If you were in Europe inflation is so low that its actually deflation (CPI dispels the 'Aussie battler' myth, January 24).

Anonymous,

Hilarious, rose coloured, big city living stuff in this article. There are plenty of people doing it tough, plenty (CPI dispels the 'Aussie battler' myth, January 24).
How about you run your numbers with some medians and take out the extreme outliers.
Electricity at $100/month is a huge impost to us.
So is internet (we cannot get ADSL and are paying robber baron wireless rates, and NBN won't be running fibre out to our place).
So is petrol.
So is food.
Luckily we're madly saving for solar (no feed in tariff in NSW anymore) and growing a lot of our own food.
The self satisfied, coffee-shop, suit-wearing, "everything is fine" view is so far off the mark it's not funny.
Inflation is manipulated to be exactly what the government wants it to be. Stuff is moved in and out as desired.
When you look at petrol, rates, power, insurance, food, internet - you know, basic stuff - CPI is heinous.
Council rates are a joke - ours up 20% and all we get is garbage collected (no town water, no sewerage). Quarterly power is a week's pay.
I can't think of one decent journo/economist who is even close to being accurate on this stuff.
Unemployment at 5.2%? No way. Look at the real underemployment rate. I'll bet it's circa 10%. What is the government's welfare obligation doing? Increasing? Decreasing?

Anonymous,

This article focuses only on Electricity prices at 2.5% of average household consumption (CPI dispels the 'Aussie battler' myth, January 24). A more representative approach of total household energy usage should also include gas consumption as well. I suspect this should be close to 2.5% as well. As an aside I wish my rent was only 6.9% of total average household consumption.

Anonymous,

Koukoulas needs to get out into the real world instead of relying on analysing "average" data. Families know what they have to spend and it ain't enough for basics (CPI dispels the 'Aussie battler' myth, January 24). There ARE families doing it tough and it is ridiculous to generalise and think everyone is equal, by saying they should gives up smokes, alcohol and take away food. What really is happening to the genuine battler is that they do go without, smokes, alcohol, dining out, movies, takeaways and yes even flash food at home, and holidays - what are they for the battler? A foreign language to most on low incomes. You keep harping on about electricity prices, but it is not just electricity. Battlers are feeling the pinch because prices across the board are outweighing their fixed income, so yes they are going without to make ends meet for the basic staples to keep their families fed and clothed. Thankfully I have a job that does that but I too have had to peel back on luxury items to ensure that I can pay the power, gas, Council rates (9% increase this year), water rates, petrol, keep up with maintenance on the house, increased clothing costs the list goes on and on. Luxury items include those things that might be bought with disposable income, the majority of households do not have disposable income. Let's not distort the reality of the world with statistics.

Anonymous,

Mcawber said income 20s expenditure 19s 6p result happiness, expenditure 20s 6p result misery (CPI dispels the 'Aussie battler' myth, January 24). That carbon tax may just tip the balance. And don't forget the knock on effect of business imposts, including MRRT and monthly tax receipts. I had to chuckle at the price of 'goat meat' reducing. How about the price war at the big supermarkets, isn't that one big factor in the CPI? Is Private Health Insurance included in CPI? Because in a months time my bill goes up 50%. PBS is up well over inflation too. And why is rent included and not Mortgage repayments? I'm afraid the article seems written in a narrow minded way.

Anonymous,

As a character in a comic strip I used to read in my childhood once said, "the high cost of living is not so bad if you don't have to pay for it." (CPI dispels the 'Aussie battler' myth, January 24.)

Anonymous,

A common mistake in these sort of comparisons with the past is to look at pretax income. I don't know the effect this would have on the 2000 to 2013 income comparison but I think it would be significant and reduce the effect. It is irrelevant but I think in Bob Menzies days the income tax was about 2/6 in the pound (CPI dispels the 'Aussie battler' myth, January 24).
I presume that GST is included in the CPI figures.
I'm sure inflation is worse than that but the whole system is so complex that you can choose your statistics to suit your argument. If real unemployment or under-employment was going up surely the CPI would go down as people had less to spend, even if they were starving.
Why is tobacco included when such a small group is affected by it?
The stats might be meaningless but there are hundreds of public servants whose job it is to invent changes to so we can't argue with them. It would take anyone else 100% of their time to understand what they mean and how they affect any articular analysis.
The bureaucracy has won the war and we can only trust our perception.

Anonymous,

The discussion here seems to highlight that the effect of the low CPI rate does not accord with other economic indicators. I offer a piece of the puzzle (CPI dispels the 'Aussie battler' myth, January 24). If we calculate CPI, using the methodology I was taught in the Mid 90s (before the use of substitution and hedonics techniques to reduce the CPI rate)inflation is well above the 2-3% target rate. much more like 5-6%. I think we would all agree that this is what general price inflation feels like. Compound that rate over a couple of decades and you will start to see why when growth is still robust and inflation is low, why everybody doesn't feel richer.While it may be boring and technical, I encourage everyone to read the shadowstats website to understand how the original intent of these numbers has been lost .

Anonymous,

The issue with CPI is that it looks at averages (CPI dispels the 'Aussie battler' myth, January 24). It is highly skewed to the wealthy where they would only pay less 6.9% of their spending on rent (if at all). The wealthy can spend much more money on accomodation and travel and other discretionary items and hence skew the spending figures for the basket of goods.
If you took the median income and worked out what spending power they had and what they spent it on, you would get a vastly different CPI basket of goods and hence different CPI rate.

Anonymous,

Rent 6.9%?
Rent for a dog box in a cheap suburb in Brisbane runs $400/wk. my daughter and her partner pay $520/wk on a net household income of $1300/wk. Thats 40% on my maths (CPI dispels the 'Aussie battler' myth, January 24).

Anonymous,

What happened to Combet's "one- off increase of 0.7% in the CPI" to cover the introduction of the carbon tax? This is a chance for you to use your investigative skills perhaps? There is no such thing as a "one-off tax" either, levy maybe but tax, no (CPI dispels the 'Aussie battler' myth, January 24).
Could it be that the increase has been quarantined until after the election this year?

Anonymous,

CPI is a basket of goods that represents the average consumption (CPI dispels the 'Aussie battler' myth, January 24). It is mainly based on urban consumption. Unemployment used to be working less than 16 hours a week and you were counted as unemployed; now it is one hour per month and this can be voluntary or in a family business. If we used the old measure unemployment would be about 20- 25%. For all these people, plus most retired and low wage earners, say 40 - 50% of the population CPI increases make relatively large differences. I have been "underemployed" and it can be a constant squeeze. Even fully employed I grow a full veggie garden and have fruit trees. Fast rising costs and slow rising wages in a global market is creating a two tier economy, that is growing less equal all the time.

Anonymous,

This article's basic premise about electricity costs on inflation is wrong and smacks of political propaganda (CPI dispels the 'Aussie battler' myth, January 24). The cost of electricity will also be reflected in the cost of everything produced or shipped within Australia because electricity is a basic business input. As such, you can expect ALL of the other cost indictors to rise to some extent due to the increased electricity cost.

Anonymous,

Stephen's major error is failing to distinguish discretionary spending (mainly in the traded goods sector where the high dollar has a beneficial inflationary impact) from the core expenses of lower income groups, such as electricity, rent and services which must be met before discretionary purchases can be made (CPI dispels the 'Aussie battler' myth, January 24). As these core expenses are rising at faster than the CPI, the capacity for lower income groups to undertake discretionary expenditure in the traded goods sector diminishes. It is self-evident, therefore, that the Stephen's "evidence" does not invalidate the claim that they are "doing it hard". The Aussie battler, as championed by John Howard, is no myth.

Anonymous,

Rent accounts for only 6.9% of the average household budget? I should sell up, settle the mortgage and rent. Or is it that only one-third of the population rents; therefore rent actually accounts for 20.7% of the household budget. I should still sell (CPI dispels the 'Aussie battler' myth, January 24).

Anonymous,

The discussions here clearly point out that the CPI is the myth, not the "Aussie Battler" (CPI dispels the 'Aussie battler' myth, January 24). The CPI is nothing more then a cleverly invented formular to help governments hide behind reality. And well healed people like you Stephen, fan the issue.

Anonymous,

Hello Stephen,
You are quite wrong in your analysis (CPI dispels the 'Aussie battler' myth, January 24). I am not a statistic, I am a low, fixed income, self funded retiree.
I do not smoke, drink, gamble, take vacations, dine out or indulge any of those other luxuries.
I have assets so do not qualify for aged pension, despite having little cash income.
There has been no Gillard Bonus for me to offset electricity cost increases.
The inflation rate this period might be low, but I have the extra cost of electricity to meet regardless of the statistical analysis you undertake.
I do not believe I am alone in this situation, but economists can't see the distress that I and those others like me are feeling.
John

Anonymous,

Where oh where are those figures coming from (CPI dispels the 'Aussie battler' myth, January 24)!! Let me give you some actual figures, yes the reality. I am a DVA pensioner. On calculating my energy costs in relation to my gross earnings, 10% of my income now goes to pay energy bills, then there is all those other fixed costs that eat into the income. I can tell you that 12 months ago energy vs fixed income was 5%, so in effect it has doubled.
I have taken steps to reduce the expenditure on energy, however the statement that "CPI dispels the Aussie Battler myth" is, in effect, a myth in itself.

Anonymous,

So many complaints...do like the British pensioners and move to the Costa De Sol in Spain where the cost of living is 40% cheaper than in the UK (CPI dispels the 'Aussie battler' myth, January 24).
About 1,500,000 retired brits cannot all be wrong.
Now with the high aussie dollar where could one move to??
New Zealand or Thailand??
Bon Voyage.

Anonymous,

The 2.5% average spent on cigarettes is spend by 20% of the population, so in those households 12.5% of their household income is spent on infecting themselves with lung cancer. That is a truly depressing thought (CPI dispels the 'Aussie battler' myth, January 25).
The inflation rate is low because of the high Aussie dollar - the price falls are all in tradable imports. If you consider the non-tradable domestic goods, the inflation rate is more like 4%.

Anonymous,

Where observed reality does not match the theory it is customary to check the observations, and re-examine the correctness of the theory. Observation indeed clearly indicates that the level of suffering is not being measured and registered by the indicators being used - and a surprising number of people in their posts here have pointed this out (CPI dispels the 'Aussie battler' myth, January 25).
The reasons for this discrepancy are pretty clear to those who have not lost their connection with ordinary citizens. An obvious cause is that for those who are poorer the worst inflating items have a greater impact - an obvious one being rent in our major cities. If you are in the sector that owns their accommodation rent increases have no impact at all, and mortgage rates have even gone down. Rent increases, by definition, are entirely borne by tenants as landlords seek to evaluate rents demanded by them in terms of ludicrous house prices.
This article, and the comments on it, are an indication again that public perception is that our economic and financial experts really don't get it. This is also why so many such experts are heralding and attempting to orchestrate a "recovery" that just ain't there
This highlights an error in all Right Wing thinking - the almost religious faith that reality can be shaped by desire - Climate Change can be wished away - "Austerity", the deliberate winding back of living standards, can restore prosperity (doh!). What else? - a recovery can be manufactured out of building blocks of deliberately elevated mood (circuses) - we will all be wealthy in the long run if we cut back on luxuries, less caviar and more bread.
Where does this "bread and circuses" and this shaping of reality by desire originate ideologically if not the belief that the creation of Good is dependent on the triumph of the Will
Or as the Germans put it "Triumph des Willens" - Welcome to 1934 - when reality and theory separated in another generation, with tragic results.
Get a grip!

Anonymous,

I have to admin I am pleased to read the thoughts of so many thinkers (CPI dispels the 'Aussie battler' myth, January 22).
I love statistics. Tell me what perspective you want and I'll manipulate the data to suit.
Those figures are ridiculous.... as is the CPI measures.
If my $700/qtr electricity bill (which I'm happy with) is only around 2.5% of the spending, I'd have to be spending around $100k/year. A $400/wk rent would have me spending $300k/year. Uh oh... I've checked my tax return and I think I'm in some serious trouble.
Did these figures include the cost of purchasing a home that hasn't been offset by the proceeds of selling one?

Anonymous,

"If the price of one product or group of products rises, in other words, it should cause a diversion of spending away from other goods and services, so putting downward pressure on the prices of those other goods and services. In theory, in a perfect world, the downward pressure on other prices would net out perfectly against the rising price of the product affected by the supply constraint, and although there would be a change in relative prices there would be no inflation, which is a change in average prices." - http://www.mpettis.com/2008/03/11/why-low-non-food-inflation-doesnt-mean-inflation-isnt-a-problem-in-china/