tag:theconversation.com,2011:/us/topics/consumer-price-index-91688/articlesConsumer Price Index – The Conversation2024-01-31T19:07:29Ztag:theconversation.com,2011:article/2222702024-01-31T19:07:29Z2024-01-31T19:07:29ZDon’t lower the price: 3 more effective ways to reduce the costs of smoking<p>Associate Health Minister <a href="https://www.dpmc.govt.nz/cabinet/portfolios/health">Casey Costello</a> recently said she was concerned about the <a href="https://www.nzherald.co.nz/nz/politics/official-documents-suggest-nz-first-minister-wants-to-freeze-excise-tax-on-cigarettes-but-she-denies-it/D5ZIEESDCFF65I7GS5L4H2FCRA/">financial burden on people who smoke</a>. She has requested advice on freezing the Consumers Price Index (CPI) adjustment applied annually to tobacco products, according to a leaked Ministry of Health document. </p>
<p>But is this really the best option to reduce the cost of smoking?</p>
<p>Costello’s proposal attracted considerable criticism, not least because the rising price of tobacco is well established as the <a href="https://www.who.int/activities/raising-taxes-on-tobacco">most effective tool</a> currently used to reduce tobacco use. </p>
<p>An <a href="https://www.health.govt.nz/system/files/documents/pages/evaluation-tobacco-excise-increases-final-27-nov2018.pdf">Ernst Young report</a> commissioned by the Ministry of Health found: </p>
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<p>There is strong evidence, both international and from within New Zealand, that demonstrates changes in consumer behaviour as a result of the tax increases –reducing uptake, cutting down consumption and increasing quit attempts, with spikes in quit attempts around January each year in New Zealand. </p>
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<p>The minister is right to be concerned about people who smoke and the enormous drain smoking imposes on their health, wellbeing and finances. But freezing the excise tax on tobacco products won’t ease those costs. </p>
<p>If the minister is serious about reducing the financial and other costs of smoking, here are three tips that will help her achieve her goal. </p>
<h2>Leave the CPI adjustment alone</h2>
<p>For people who smoke a pack a day, freezing the CPI adjustment means they will save around NZ$12 a week or $730 a year. </p>
<p>But if those people quit smoking, they would save $35-$50 a day, or around $13,000 to $15,000 each year. The most important thing that will ease the financial cost for people who smoke is to help them stop smoking – freezing the tobacco excise tax will actually make quitting less likely.</p>
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<h2>Examine what makes it so hard to quit</h2>
<p>We know most people who smoke regret having started and want to quit. <a href="https://aspireaotearoa.org.nz/sites/default/files/2023-12/ITC%20Adult%20NZ%20Report-Dec%2010%202023.pdf">Our study</a> of more than a thousand people who smoke found 74% regret having started, 84% would like to stop smoking, and 81% have tried to stop smoking. </p>
<p>Given this very strong desire not to smoke, what’s preventing people from realising their goal? The answer is simple: addiction. Nearly 90% of people who smoke said they are somewhat or very addicted to smoking.</p>
<p>Tobacco companies have manipulated cigarette nicotine content and the speed with which nicotine is delivered to <a href="https://truthinitiative.org/research-resources/harmful-effects-tobacco/how-big-tobacco-made-cigarettes-more-addictive#:%7E:text=Sugars%252C%2520flavors%2520and%2520menthol%2520were,importance%2520to%2520tobacco%2520company%2520executives.">make smoking highly addictive</a>. However, it’s now possible to <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3632983/">remove most of the nicotine</a> from tobacco.</p>
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Read more:
<a href="https://theconversation.com/forget-tobacco-industry-arguments-about-choice-heres-what-young-people-think-about-nzs-smokefree-generation-policy-193529">Forget tobacco industry arguments about choice. Here's what young people think about NZ's smokefree generation policy</a>
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<p><a href="https://www.nejm.org/doi/pdf/10.1056/NEJMsa1502403">Research</a> shows people who smoke very low-nicotine cigarettes cannot smoke enough to get a satisfying dose of nicotine, so they lose interest in smoking and smoke fewer cigarettes. </p>
<p>A <a href="https://www.sciencedirect.com/science/article/pii/S0955395921003418">recent review</a> found low-nicotine cigarettes increased the likelihood of smoking cessation among all population groups. This includes people with psychiatric comorbidities or low socioeconomic status – the group Minister Costello is particularly keen to assist. It will also minimise the likelihood of young people starting smoking.</p>
<p>Aotearoa New Zealand is ready to implement denicotinisation (reducing the levels of nicotine in tobacco products). A <a href="https://tobaccocontrol.bmj.com/content/tobaccocontrol/early/2023/01/10/tc-2022-057655.full.pdf">modelling study</a> predicted this move would bring profound, rapid and equitable reductions in smoking prevalence. However, the new government has announced plans to <a href="https://theconversation.com/reducing-nicotine-in-tobacco-would-help-people-quit-without-prohibiting-cigarettes-221383">repeal the smokefree law</a> that mandated denicotinisation.</p>
<h2>Use tax revenue for community support</h2>
<p>Because smoking is a <a href="https://www.tandfonline.com/doi/pdf/10.1080/09581596.2014.980396">social practice</a>, many people may find quitting support helpful, even when only low-nicotine cigarettes are available. </p>
<p>Minister Costello has an opportunity to use the tax revenue generated by tobacco sales to support smoking cessation. For example, allocating funds generated by tobacco sales would enable her to increase funding for services that support people who smoke to quit. </p>
<p>Additional targeted support could be particularly helpful to groups that bear a disproportionate portion of the harms caused by smoking.</p>
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Read more:
<a href="https://theconversation.com/no-doubt-about-it-smokefree-laws-cut-heart-attacks-in-big-way-73724">No doubt about it: smokefree laws cut heart attacks in big way</a>
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<p>Community support has a crucial role to play, as people with local knowledge understand the needs of fellow community members and can respond with tailored advice.</p>
<p>The minister doesn’t have to reinvent the wheel or replace the current evidence-based approach. Several measures that would minimise the enormous burden smoking imposes on thousands of people are ready for implementation – starting with the <a href="https://www.health.govt.nz/system/files/documents/publications/hp7801_-_smoke_free_action_plan_v15_web.pdf">Smokefree Aotearoa 2025 Action Plan</a>. </p>
<p>The government should also abandon its plans to repeal New Zealand’s smokefree legislation. The measures this law introduces could profoundly reduce the many costs smoking imposes on those who do it. Furthermore, it would benefit the very people whose plight troubles the minister.</p><img src="https://counter.theconversation.com/content/222270/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Janet Hoek currently receives research funding from the Health Research Council of New Zealand, the Cancer Society of New Zealand, the University of Queensland (Australia) and the National Health and Medical Research Council (Australia). Her affiliations include the Society for Nicotine and Tobacco Research, Health Coalition Aotearoa's Smokefree Expert Advisory Group, Aukati Tupeka Kore Group, Project Sunset (International and Oceania), the Australian Government Department of Health and Aged Care, the NZ Cancer Society Research Collaboration, and the Australasian Tobacco Issues Group.</span></em></p><p class="fine-print"><em><span>Andrew Waa receives funding from the Health Research Coincil of New Zealand. He is a member of the Health Coalition Aotearoa and a member of Te Ropu Tupeka Kore. </span></em></p><p class="fine-print"><em><span>Richard Edwards receives research funding from the Health Research Council of New Zealand, the Cancer Society of New Zealand, the University of Queensland (Australia) and the National Institute of Health (US). His affiliations include the Society for Nicotine and Tobacco Research, the Public Health Communication Centre Briefing, Smokefree Expert Advisory Group, Health Coalition Aotearoa and the National Tobacco Control Advocacy Service Advisory Group.</span></em></p>If the government is serious about reducing the cost of smoking, it should stick with Labour’s smokefree legislation rather than freezing the price of smoked tobacco products.Janet Hoek, Professor of Public Health, University of OtagoAndrew Waa, Lecturer in Public Health, University of OtagoRichard Edwards, Professor of Public Health, University of OtagoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2215902024-01-23T10:17:21Z2024-01-23T10:17:21ZWhy Australian workers’ true cost of living has climbed far faster than we’ve been told<figure><img src="https://images.theconversation.com/files/570806/original/file-20240123-17-b03k46.png?ixlib=rb-1.1.0&rect=1941%2C1225%2C1794%2C862&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Why is Prime Minister Anthony Albanese suddenly so keen to deliver extra cost-of-living relief – keen enough to summon Labor members of parliament to Canberra for a briefing on Wednesday, followed by a <a href="https://www.npc.org.au/speaker/2024/1281-the-hon-anthony-albanese-mp">National Press Club</a> address on Thursday?</p>
<p>One immediate reason is he is keen to make sure Labor wins the upcoming byelection in the outer-Melbourne electorate of Dunkley on <a href="https://www.abc.net.au/news/elections/dunkley-by-election-2024">March 2</a>.</p>
<p>But the cost of living wouldn’t matter much for Dunkley – and it wouldn’t matter much for the rest of us – unless it was really biting.</p>
<p>And despite what the treasurer himself has been trying to tell us, it is biting.</p>
<p>Treasurer Jim Chalmers has been pointing out that in the June quarter and the September quarter (the three months to June and to September) real wages <a href="https://twitter.com/JEChalmers/status/1744264941727793619">grew</a> for the first time in years. By that he means that the <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">wages index</a> compiled by the Bureau of Statistics began growing faster than the <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">consumer price index</a>.</p>
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<p>It’s better than growing more slowly, but it tells us next to nothing about what’s happening to buying power. Here’s why.</p>
<h2>Why CPI understates today’s living costs</h2>
<p>Way back in the late 1990s, more than a quarter of a century ago, the consumer price index (<a href="https://theconversation.com/whats-in-the-cpi-and-what-does-it-actually-measure-165162">CPI</a>) used to actually reflect the cost of living. It included all of the big costs incurred by households, including – importantly – mortgage interest payments. At the time, mortgages accounted for an average of <a href="https://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/10F150019D15C748CA2571CC000CB34A/$File/64530_1997.pdf">$5</a> of every $100 each wage earner spent.</p>
<p>Then in <a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6453.01997?OpenDocument">September 1998</a>, in response to representations from the Reserve Bank and the Treasury, the bureau changed the way it calculated the index. It <a href="https://images.theconversation.com/files/570734/original/file-20240122-23-dkqq0f.png">excluded</a> mortgage and other interest payments, in a decision it acknowledged would make the index worse at measuring living costs.</p>
<p>It still carries the warning on its <a href="https://www.abs.gov.au/methodologies/selected-living-cost-indexes-australia-methodology/jun-2023">website</a>, saying the consumer price index is </p>
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<p>not the conceptually ideal measure for assessing the changes in the purchasing power of the disposable incomes of households.</p>
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<p>The index actually does a pretty good job of measuring changes in living costs at times when mortgage rates aren’t much changing. But at times when they are tumbling, it’ll overestimate living costs. And when mortgage rates are soaring – as they have been lately – it will way understate what’s happening to living costs.</p>
<p>We know by how much. For years, the bureau has also published a separate set of measures it pointedly calls “<a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/selected-living-cost-indexes-australia/latest-release">living cost indexes</a>”. These <em>do</em> include mortgage and other interest charges, and for households headed by employees (for whom the buying power of wages matters) they are substantial.</p>
<h2>Living costs are up 9%, rather than 5.4%</h2>
<p>While the consumer price index (the one quoted by the treasurer) increased 5.4% in the year to September, the living cost index for households headed by wage earners climbed <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/selected-living-cost-indexes-australia/latest-release">9%</a>.</p>
<p>For these working households, the price of food climbed 4.8% in the year to September, the price of electricity <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">14.5%</a> and the price of mortgage interest charges <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/selected-living-cost-indexes-australia/sep-2023/646703.xlsx">68%</a>. </p>
<p>It’s the increases in mortgage rates that have made the increases in the other prices hurt so much.</p>
<p>The overall increase in prices faced by wage-earners – 9% – is way above the typical wage increase of <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">4%</a>.</p>
<p>Bill Mitchell of the University of Newcastle points out that on this measure, the correct one, the buying power of wages has been falling for two and a half years. He says it puts the treasurer’s comments in a <a href="https://billmitchell.org/blog/?p=61493">wholly different light</a>.</p>
<h2>Why we should distrust the CPI</h2>
<p>Working Australians are right to distrust the consumer price index, which is something the Australian Council of Social Service <a href="https://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/10F150019D15C748CA2571CC000CB34A/$File/64530_1997.pdf">warned the bureau about</a> when it made the change.</p>
<p>Each month, the Melbourne Institute asks Australians whether their family finances have deteriorated over the previous year. Usually, about one-third of those surveyed say they have.</p>
<p>But for more than a year now, around 50% of those surveyed have been saying their finances have got worse. That’s a peak not seen since the global financial crisis, and one that has lasted longer.</p>
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<p>Asked about family finances over the next 12 months, more than 30% say they’ll worsen further. It’s usually 20%.</p>
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<p>Looked at from today’s perspective, the arguments put forward in 1997 for weakening the consumer price index as a measure of living costs are unimpressive.</p>
<p>Back then, the <a href="https://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/10F150019D15C748CA2571CC000CB34A/$File/64530_1997.pdf">Treasury</a> noted that many welfare recipients didn’t have mortgages and that a consumer price index that excluded them would better reflect their living costs.</p>
<p>The <a href="https://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/10F150019D15C748CA2571CC000CB34A/$File/64530_1997.pdf">Reserve Bank</a> argued interest rates were “conceptually
different from other prices”. In any event, it wanted them excluded because it found it hard to use higher interest rates to bring down inflation if those higher rates pushed the measure of inflation up.</p>
<p>The change attracted <a href="https://cdn.theconversation.com/static_files/files/3008/colebatchage.pdf">little attention</a> at the time, because mortgage rates weren’t moving much. By the time they did, the change had been bedded down.</p>
<h2>But here’s some good news</h2>
<p>For most of the time since the change, mortgage rates have either increased gradually or been cut, meaning the difference between what the consumer price index has been telling us and what’s been happening to us hasn’t been too stark. It’s been stark lately because interest rates have been rising quickly.</p>
<p>The good news – and there is good news – is that financial markets expect rates to <a href="https://www.asx.com.au/markets/trade-our-derivatives-market/futures-market/rba-rate-tracker">begin falling</a> this year, with the next move down. </p>
<p>Inflation as measured by the consumer price index (inflation excluding mortgage rates) is already falling.</p>
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<p>We get the next official update on the consumer price index <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">next week</a> (and the update for the lesser-known <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/selected-living-cost-indexes-australia/sep-2023">living cost indexes</a> a week after that).</p>
<p>It makes now a particularly good time to announce measures to address the cost-of-living crisis. We need them because we really are in something of a crisis. Things are a lot worse than the official index suggests. </p>
<p>And there’s a chance that soon they’ll begin to get better, allowing the prime minister to claim a win.</p><img src="https://counter.theconversation.com/content/221590/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin is economics editor of The Conversation AU.</span></em></p>The official figures tell us inflation is 5.4%. But for working families, it’s actually 9%. Yet there is some good news ahead.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2053912023-05-10T20:01:46Z2023-05-10T20:01:46ZNo, the budget does not make further interest rate rises more likely<p>Inflation, as Prime Minister Anthony Albanese has said, is “<a href="https://www.theguardian.com/australia-news/live/2023/may/08/australia-politics-live-budget-2023-news-jim-chalmers-jobseeker-treasurer-cost-of-living-relief-albanese-parliament-dutton?page=with:block-645884438f0830193ba62e97">a tax on the poor</a>”. </p>
<p>The great budget challenge for him and Treasurer Jim Chalmers has been to deliver help to Australians struggling with cost-of-living pressures without adding to inflation.</p>
<p>So has the government achieved that aim? While it’s too soon to be certain, given the vagaries that have beset economic forecasting in recent years, in my view the measures announced do not add to the prospect of the Reserve Bank of Australia raising interest rates further. </p>
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Read more:
<a href="https://theconversation.com/budget-2023-budgeting-for-difficult-times-is-hard-just-ask-chalmers-205209">Budget 2023: budgeting for difficult times is hard – just ask Chalmers</a>
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<p>The RBA’s latest forecasts, <a href="https://www.rba.gov.au/publications/smp/2023/may/">published last week</a> after it raised rates for the 11th time in 12 months, now assume no further rate rises will be needed for inflation to fall back to the central bank’s 2-3% target range by mid-2025. (RBA Governor Lowe has said taking this length of time is better than forcing inflation down quicker at the expense of job losses.)</p>
<p>This suggests the RBA will only raise interest rates in June or July if there’s new evidence that inflation is staying higher than expected.</p>
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<h2>How the budget may change the RBA’s view</h2>
<p>The only price rises resulting from the budget are higher prices for smokers, with the tobacco excise to be increased by 5% a year over three years. </p>
<p>To avoid adding to inflation, the government has focused on budget measures that directly reduce costs of essential goods and services for those on lower incomes, notably household energy bills (some households will <a href="https://www.energy.gov.au/government-priorities/energy-programs/energy-bill-relief-fund">save $500 a year</a>) and medical expenses (increasing bulk-billing incentives and reducing the cost of some medicines). </p>
<p>Treasury <a href="https://budget.gov.au/content/bp1/download/bp1_bs-2.pdf">estimates</a> these measures will directly reduce inflation by 0.75 of a percentage point in 2023–24.</p>
<p>What matters most is how they affect the Consumer Price Index’s “<a href="https://www.rba.gov.au/education/resources/explainers/inflation-and-its-measurement.html">trimmed mean</a>” measure of underlying inflation. This excludes the 15% of prices that climb the most and the 15% of prices that climb the least (or fall). The RBA often pays more attention to the trimmed mean than the headline CPI figure because it is less influenced by temporary factors. </p>
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<p>Energy and medical prices may end up among the prices that fall and thus get excluded from the measure. So the trimmed mean measure may be less reduced than the headline number. </p>
<p>On a more positive note, the high profile of these price reductions may contribute more to moderating inflationary expectations. Because inflation, as Lowe has indicated with all his warnings about stagflation, is <a href="https://theconversation.com/1970s-style-stagflation-now-playing-on-central-bankers-minds-185868">a lot about psychology</a>. </p>
<h2>What about those payments?</h2>
<p>Households receiving higher support payments such as unemployment benefits, single parenting payment, youth allowance and rental assistance will have more money to spend.</p>
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Read more:
<a href="https://theconversation.com/budget-2023-at-a-glance-major-measures-cuts-and-spends-205211">Budget 2023 at a glance: major measures, cuts and spends</a>
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<p>But not much, and the measures are tightly targeted to those most in need. This contrasts with the cost-of-living relief measures of the previous government, whose temporary cuts to petrol excise and so-called “<a href="https://theconversation.com/the-low-and-middle-income-tax-offset-has-been-extended-yet-again-it-delivers-help-neither-when-nor-where-its-needed-160772">low and medium tax offset</a>” provided greater benefits to the affluent.</p>
<p>Treasury expects these measures to only add modestly to aggregate demand. Total household spending is forecast to grow by 1.5% in 2023–24. This will not be a significant source of inflationary pressure. </p>
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Read more:
<a href="https://theconversation.com/budget-spends-big-on-support-but-wont-make-much-difference-to-poverty-205219">Budget spends big on support but won't make much difference to poverty</a>
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<p>The budget papers’ forecast for inflation by June 2024 is 3.25%, slightly less than the RBA’s forecast of 3.5%. The forecast by June 2025 is 2.75%, compared to the RBA’s 3%.</p>
<p>It remains to be seen if the RBA’s next set of forecasts will be closer to those of Treasury. These will be published in August, though the the bank may be guided by them before then. </p>
<p>If they are, then further rate rises will be less likely.</p><img src="https://counter.theconversation.com/content/205391/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins was formerly a senior economist at both the Reserve Bank and Treasury.</span></em></p>The RBA’s latest forecasts assume no further rate rises will be needed. There’s nothing in the budget that should change that.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1985042023-01-25T05:39:11Z2023-01-25T05:39:11ZWith inflation still rising, the RBA will almost certainly lift interest rates in February<p>Interest rates are almost certain to rise again in February, after the latest Consumer Price Index figures showing inflation hit 7.8% in 2022 – its highest rate in 33 years.</p>
<p>The data from the Australian Bureau of Statistics shows a 1.9% increase in the CPI in the December quarter. Combined with the strong increases in the first nine months of the year, inflation in 2022 was at the highest rate since March 1990.</p>
<p>This reflects a post-pandemic spend-a-thon. Domestic holiday travel and accommodation rose 13.3% over 2022, while international holiday travel and accommodation rose 7.6%. Rents increased by 4%. Power bills increased by 8.6%.</p>
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<p>While these price rises were particularly large, the rise in inflation has been quite broadly based. The ABS survey shows the price of 87% of all goods and services increased by more than 2.5% – which is where the central bank generally likes to keep price increases.</p>
<p>The annual change is a touch lower than the Reserve Bank of Australia’s upper forecast of 8% issued in November last year. But it still remains well above the central bank’s target band of 2-3%.</p>
<p>Measures of underlying inflation, which strip out the impact of unusually volatile sectors, also came in at record highs. The trimmed-mean inflation rate (which excludes the 15% of fastest growing and the 15% growing slowest growing prices) was 6.9%, higher than forecast in November. The weighted median price, another measure of underlying inflation, rose by 5.8%. </p>
<p>All of these statistics paint a clear picture: prices are increasing apace in every part of the Australian economy.</p>
<h2>What this means for the RBA</h2>
<p>This all but guarantees the RBA board will increase interest rates by 0.25 percentage points at its next meeting, on February 7, and likely several more times in 2023. </p>
<p>To fulfil its mandate to keep inflation between 2% and 3%, the bank must further reduce aggregate spending in the economy – principally through lifting the interest rates. </p>
<p>The rationale is that higher rates will encourage households to spend less and save more. A higher cash rate will also make the dollar more valuable as it encourages people to hold Australian dollars. This will help make imports cheaper than they otherwise would be.</p>
<p>It will also, of course, feed into higher loan repayments for households with a mortgage. This will take more spending power out of economy and suppress house prices as the amount of money borrowers can afford falls. Higher mortgage repayments will also cut into household spending, which should help to bring down inflation over 2023.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/a-brief-history-of-the-mortgage-from-its-roots-in-ancient-rome-to-the-english-dead-pledge-and-its-rebirth-in-america-193005">A brief history of the mortgage, from its roots in ancient Rome to the English 'dead pledge' and its rebirth in America</a>
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<h2>More than 25 basis points?</h2>
<p>There remains an outside chance the RBA will go harder than a 25-basis-point increase and return to the 50-basis-point increases delivered in June, July, August and September of 2022. </p>
<p>This is unlikely but cannot be ruled out, given the rate of inflation and the current strong state of the labour market. The official unemployment rate of 3.5% is a record low and a sign of the economy’s strength – one able to handle higher interest rates without plunging into recession.</p>
<p>While economists still expect inflation to have peaked, the pace at which it will then fall is still an open question. </p>
<p>If rents continue to rise or wage growth picks up, it’s possible CPI will continue to rise. This would almost certainly result in the RBA lifting rates. </p>
<p>The more optimistic scenario involves inflation falling more quickly, as is already happening in the US. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/global-recession-is-increasingly-likely-heres-how-australia-could-escape-191336">Global recession is increasingly likely. Here's how Australia could escape</a>
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<p>If the rate of inflation starts to fall more quickly towards the 2-3% target band then the RBA will not need to increase interest rates by quite as much. </p>
<p>Fortunately inflation expectations remain largely in check. This means Australia should avoid a costly recession as the RBA lowers the inflation rate back towards the target band.</p>
<p>One clear takeaway from 2022 is that there remains a large degree of uncertainty in the outlook of the economy. That means policy makers will have to remain flexible when setting macroeconomic policy, ready to hike or cut interest rates as Australia’s economy changes.</p><img src="https://counter.theconversation.com/content/198504/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Isaac Gross does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Interest rates are almost certain to rise again in February, after the latest Consumer Price Index figures showing inflation hitting a record high of 7.8% in 2022.Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1959362022-12-06T05:24:59Z2022-12-06T05:24:59ZThis latest increase in RBA interest rates might well be the last, for some time<figure><img src="https://images.theconversation.com/files/499177/original/file-20221206-19601-800hvm.png?ixlib=rb-1.1.0&rect=826%2C712%2C3167%2C1556&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>You might not know it from reading Tuesday’s statement announcing Australia’s eighth consecutive increase in interest rates, but our Reserve Bank might finally have done enough.</p>
<p>The statement says inflation is still “<a href="https://www.rba.gov.au/media-releases/2022/mr-22-41.html">too high</a>” and that the bank expects to increase rates further, although it is “not on a pre-set course”.</p>
<p>But, as it happens, the bank is unlikely to increase rates again for a further two months. The board doesn’t meet in January, meaning the nine weeks between now and its first meeting for 2023 on February 7 will provide an unusually long time for reflection – the first after eight relentless months of hikes.</p>
<p>From time to time, Reserve Bank officials talk about the idea of a “pause”. AMP chief economist Shane Oliver has counted the number of occasions they have referred to the prospect of a “pause” in public pronouncements in the past month. He has counted six.</p>
<h2>Inflation to hit 8%, while weakening</h2>
<p>Although the annual inflation figure for the year to December due on January 25 is expected to be high – the bank is expecting <a href="https://www.rba.gov.au/media-releases/2022/mr-22-41.html">8%</a> – the quarter-to-quarter result is likely to show inflation weakening.</p>
<p>The Bureau of Statistics releases the <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">quarterly inflation figures</a> only once every three months. But for some time now it has also been calculating inflation <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release">monthly</a>, using a smaller survey that seems to give a pretty good indication of what the larger survey is about to show.</p>
<p>Oliver has graphed what the smaller survey has been saying each month about inflation over the previous three months alongside what the larger quarterly survey has been saying. The two line up, except that in recent months the monthly measure has been sliding.</p>
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<p><iframe id="eEn3z" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/eEn3z/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<p>This suggests that the official quarterly figure released in January will be weak.</p>
<p>Oliver concedes that the new monthly measure needs to be interpreted with caution, partly because it excludes 30% of the items included in the official quarterly measure, among them gas and electricity. But he says if 70% of the quarterly measure is cooling down, “that has to be a positive sign”.</p>
<p>Globally, oil prices and wheat prices and the prices of other things affected by Russia’s invasion of Ukraine are down <a href="https://markets.businessinsider.com/commodities/wheat-price/usd?op=1">one-quarter</a> to <a href="https://tradingeconomics.com/commodity/crude-oil">one-third</a> from their peaks in the middle of the year, undoing much of what has been driving inflation.</p>
<h2>The US is considering moderation</h2>
<p>In the United States, where inflation peaked at <a href="https://tradingeconomics.com/united-states/inflation-cpi">9.1%</a> in June and has since slid to 7.7%, the head of the Federal Reserve Jerome Powell has begun talking about “<a href="https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm">moderating the pace of rate increases</a>” saying given all he has done, he mightn’t need to raise rates much further to tame inflation.</p>
<p>Australia’s Reserve Bank has already moderated the size of its increases, cutting each one from 0.5 percentage points per month to 0.25 points in September. </p>
<p>If it merely wants to get inflation down (as it says it does) and not needlessly damage the economy along the way, there’s a good case for leaving rates steady at its first meeting for the year in February, and then waiting until sees the full impact of what it has done so far.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/global-recession-is-increasingly-likely-heres-how-australia-could-escape-191336">Global recession is increasingly likely. Here's how Australia could escape</a>
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<p>Australia’s eight rate rises to date are set to push up the cost of payments on a typical $600,000 variable mortgage by a total of $1,000 per month.</p>
<p>The bank said in October that although most borrowers should be able to weather that increased financial pressure for some time, many would “need to curtail their consumption and some could <a href="https://www.rba.gov.au/publications/fsr/2022/oct/pdf/box-b-the-impact-of-rising-interest-rates-and-inflation-on-indebted-households-cash-flows.pdf">ultimately see their savings buffers exhausted</a>”.</p>
<p>If these households have limited ability to make adjustments to their financial situation (such as by increasing their hours worked) they could fall into arrears and “may eventually need to sell their homes or may even enter into foreclosure”. </p>
<p>For fixed-rate borrowers, things are worse. About one-third of mortgages are on fixed rates, and about two-thirds of them are <a href="https://www.rba.gov.au/publications/fsr/2022/oct/pdf/02-household-business-finances-in-australia.pdf">due to expire next year</a>. Many were taken out at fixed rates of around 2%. Depending on how high the Reserve Bank pushes things, those borrowers will suddenly find themselves paying 6-7%.</p>
<h2>We’re tightening our belts</h2>
<p>Spending plans are already crumbling. Asked whether now is a “good time to buy a major household item” in the Westpac-Melbourne Institute November confidence survey, consumers’ answers were about as dismal as they have ever been. Around <a href="https://library.westpaciq.com.au/content/dam/public/westpaciq/secure/economics/documents/aus/2022/11/er20221108BullConsumerSentiment.pdf">40%</a> said they planned to spend less on gifts this year than the year before – the highest proportion since the question was first asked in 2009. </p>
<p>Wednesday’s national accounts will show company profits fell by a seasonally adjusted <a href="https://www.abs.gov.au/statistics/economy/business-indicators/business-indicators-australia/sep-2022">12.4%</a> in the three months to September, led down by profits in retail (-6%), manufacturing (-21%) and finance (-43%). Accommodation (up 64% after years in which it was hard to travel) is the only big exception.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/in-defence-of-rba-governor-lowe-an-easy-scapegoat-for-rates-194037">In defence of RBA Governor Lowe: an easy scapegoat for rates</a>
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<p>Quarterly economic growth is expected to be weak, although the annual figure will look good because things were worse during the lockdowns a year before.</p>
<p>The national accounts will also show a jump in wage payments of <a href="https://www.abs.gov.au/statistics/economy/business-indicators/business-indicators-australia/sep-2022">2.9%</a> over the quarter, and 11% over the year – which sounds high, but much of it will be because of the extra 690,000 people employed. Pay per worker will have climbed 4.7%.</p>
<p>A good reading of Wednesday’s national accounts will be that eight consecutive increases in mortgage rates are starting to bite into household budgets in exactly the way the Reserve Bank wants, and that there’s a chance they’ll bite too hard.</p>
<p>On February 7 the board might feel entitled to take the view that it might have done enough, and hold off for a while while it waits to see how things play out.</p><img src="https://counter.theconversation.com/content/195936/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The full effects of the eight consecutive increases in the Reserve Bank’s cash rate are yet to become apparent, and there are signs inflation is on the way down.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1902192022-09-12T19:31:12Z2022-09-12T19:31:12ZThe Bank of Canada’s own policy is the reason why inflation is so high<figure><img src="https://images.theconversation.com/files/483805/original/file-20220909-15-zuv498.JPG?ixlib=rb-1.1.0&rect=0%2C0%2C5584%2C3770&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Governor of the Bank of Canada Tiff Macklem speaks at a press conference in Ottawa in June 2022.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/ Patrick Doyle</span></span></figcaption></figure><p>The Bank of Canada has raised interest rates again in an effort to quell inflation. The central bank <a href="https://www.cp24.com/news/bank-of-canada-raises-key-interest-rate-by-0-75-says-it-likely-needs-to-go-higher-1.6058048">raised its policy rate by 0.75 percentage points</a> on Sept. 7, <a href="https://www.bankofcanada.ca/2022/09/fad-press-release-2022-09-07/">bringing its benchmark overnight rate to 3.25 per cent</a>. Economists are <a href="https://www.thestar.com/business/opinion/2022/09/10/the-bank-of-canada-has-no-choice-but-to-continue-raising-the-rate-of-interest.html">expecting the central bank to raise it again before the end of the year</a>.</p>
<p>By now, it’s clear that the Bank of Canada did not anticipate the current rate of inflation. When inflation first started increasing last year, the central bank was slow to start tightening monetary policy. Now that inflation is persistent, the Bank of Canada <a href="https://www.bankofcanada.ca/2022/01/fad-press-release-2022-01-26/">is making up for lost time by aggressively raising its policy rate</a> to get the inflation rate back on target.</p>
<p><a href="https://www.bankofcanada.ca/2022/09/getting-inflation-back-to-normal/">Monetary policy has a delayed impact on the economy</a>, meaning that a change in monetary policy today will affect the economy about 12 to 18 months from now. </p>
<p>Although <a href="https://theconversation.com/why-are-prices-so-high-blame-the-supply-chain-and-thats-the-reason-inflation-is-here-to-stay-169441">supply chain problems</a>, <a href="https://theconversation.com/how-russia-is-using-gas-as-a-political-tool-to-win-support-for-the-ukraine-war-189501">high energy prices from the war in Ukraine</a> and labour shortages have exacerbated inflation, the unprecedented expansionary monetary policy by the Bank of Canada last year is an important source of the high inflation we observe today. </p>
<figure class="align-center ">
<img alt="A line graph that shows the current levels of inflation above the Bank of Canada's inflation target" src="https://images.theconversation.com/files/483808/original/file-20220909-24-ybd5i.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483808/original/file-20220909-24-ybd5i.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483808/original/file-20220909-24-ybd5i.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483808/original/file-20220909-24-ybd5i.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483808/original/file-20220909-24-ybd5i.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483808/original/file-20220909-24-ybd5i.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483808/original/file-20220909-24-ybd5i.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A comparison of the Bank of Canada’s inflation target and the current core and headline inflation rates.</span>
<span class="attribution"><span class="source">Bank of Canada</span>, <span class="license">Author provided</span></span>
</figcaption>
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<h2>Getting back on track</h2>
<p>The <a href="https://www.bankofcanada.ca/core-functions/monetary-policy">goal of Canada’s monetary policy</a>, jointly determined by the Government of Canada and the Bank of Canada, is to <a href="https://www.bankofcanada.ca/core-functions/monetary-policy/agreement-inflation-control-target/">keep the inflation rate within a range of one to three per cent</a>, with two per cent being the most desirable rate.</p>
<p>In early 2021, all key inflation indicators started to rise dramatically, and as of now, are all well above the two per cent inflation target. </p>
<p>The total consumer price index inflation rate was <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/220720/dq220720a-eng.htm">8.1 per cent in June 2022</a> and <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/220816/dq220816a-eng.htm">fell to 7.6 per cent in July 2022</a>, mostly because of a decline in gasoline prices. The core consumer price index inflation was also well above five per cent in July.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/an-economist-explains-what-you-need-to-know-about-inflation-188959">An economist explains: What you need to know about inflation</a>
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<hr>
<p>Inflation also rose in the <a href="https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html">United States</a>, <a href="https://ec.europa.eu/eurostat/documents/2995521/14675409/2-31082022-AP-EN.pdf/e4217618-3fbe-4f54-2a3a-21c72be44c53">Europe</a> and the <a href="https://www.theguardian.com/business/2022/jun/22/uk-inflation-rises-to-91-its-highest-rate-in-40-years">United Kingdom</a>, with annual inflation in these countries now running at around 9 per cent and central banks flagrantly missing their inflation targets.</p>
<p>At the onset of the COVID-19 pandemic in March 2020, the Bank of Canada <a href="https://www.cbc.ca/news/canada/bank-of-canada-rate-decision-1.5779813">rapidly lowered the policy rate to near zero</a> and kept it there until early 2022. Since then, the Bank <a href="https://www.cbc.ca/news/business/bank-of-canada-rate-hike-1.6574457">has been steadily increasing the policy rate until the most recent hike</a>.</p>
<figure class="align-center ">
<img alt="A line graph showing that the Bank of Canada's interest rate has increased sharply since the beginning of 2022" src="https://images.theconversation.com/files/483586/original/file-20220908-9292-r3n7z6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483586/original/file-20220908-9292-r3n7z6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=352&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483586/original/file-20220908-9292-r3n7z6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=352&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483586/original/file-20220908-9292-r3n7z6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=352&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483586/original/file-20220908-9292-r3n7z6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=442&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483586/original/file-20220908-9292-r3n7z6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=442&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483586/original/file-20220908-9292-r3n7z6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=442&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">This graph shows the Bank of Canada’s policy interest rate between 2016 and 2022.</span>
<span class="attribution"><span class="source">Bank of Canada</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>According to the central bank, it could be years before its policy rate is back to normal levels. Currently, the Bank of Canada estimates that inflation will decrease to about three per cent by the end of 2023 and <a href="https://www.bankofcanada.ca/2022/07/fad-press-release-2022-07-13/">return to the two per cent target by the end of 2024</a>. </p>
<p>But this remains to be seen. In this regard, back in 2020 <a href="https://www.bnnbloomberg.ca/bank-of-canada-keeps-key-interest-rate-on-hold-1.1514208">the Bank was expecting the policy rate to remain at 0.25 per cent until 2023,</a> but is now at 3.25 per cent and rising. </p>
<h2>Bank of Canada assets</h2>
<p>In response to the COVID-19 pandemic, the Bank of Canada <a href="https://www.bankofcanada.ca/markets/market-operations-liquidity-provision/covid-19-actions-support-economy-financial-system/">introduced a large number of lending programs and used non-interest rate tools</a> — known as nonconventional monetary policy — to provide liquidity to the financial markets and stimulate the economy. </p>
<p>This led to an unprecedented increase in the Bank of Canada’s balance sheet, with the central bank <a href="https://www.bankofcanada.ca/2021/09/bank-canada-balance-sheet/">buying more than half a trillion dollars of financial assets,</a> primarily in the form of Government of Canada securities. Before the pandemic, the Bank of Canada’s holdings of securities were about $100 billion.</p>
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<img alt="A line graph showing that the Bank of Canada's assets increased sharply after 2020" src="https://images.theconversation.com/files/483587/original/file-20220908-9311-ibzya8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483587/original/file-20220908-9311-ibzya8.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=363&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483587/original/file-20220908-9311-ibzya8.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=363&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483587/original/file-20220908-9311-ibzya8.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=363&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483587/original/file-20220908-9311-ibzya8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=456&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483587/original/file-20220908-9311-ibzya8.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=456&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483587/original/file-20220908-9311-ibzya8.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=456&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Bank of Canada purchased a large amount of assets during the COVID-19 pandemic.</span>
<span class="attribution"><span class="source">Bank of Canada</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The expansion in the Bank of Canada’s balance sheet led to a huge injection of liquidity in the financial system and led to an increase in the reserves that commercial banks have in their accounts with the Bank of Canada. In fact, these reserves <a href="https://www.bankofcanada.ca/2022/06/staff-discussion-paper-2022-13/">increased by more than 1,500 times their pre-COVID amount</a>. Such increases in bank reserves are generally considered to be inflationary.</p>
<h2>Restoring faith in the Bank of Canada</h2>
<p>The Bank of Canada’s recent aggressive monetary tightening will be transmitted to the real economy through higher interest rates and lower asset prices (including housing prices), and will most likely kill the post-COVID economic expansion. </p>
<p>With inflation seemingly out of control, central banks <a href="https://www.theglobeandmail.com/opinion/article-the-bank-of-canada-has-a-credibility-problem-and-its-not-all-pierre/">appear to be losing credibility</a>. The public trusts central banks to protect the buying power of money, but the increasing cost of living is eroding this trust.</p>
<p>The Bank of Canada, and other central banks including the <a href="https://www.cnbc.com/2022/09/08/fed-chair-powell-vows-to-raise-rates-to-fight-inflation-until-the-job-is-done.html">Federal Reserve</a>, the <a href="https://www.cnbc.com/2022/09/07/european-central-bank-could-unleash-a-jumbo-rate-hike.html">European Central Bank</a> and the <a href="https://www.aljazeera.com/news/2022/8/4/bank-of-england-raises-interest-rates-in-bid-to-tame-inflation">Bank of England</a>, are all desperately trying to fight inflation and <a href="https://financialpost.com/opinion/jack-mintz-credibility-in-play-for-bank">restore their credibility</a>.</p>
<figure class="align-center ">
<img alt="People walk past a building" src="https://images.theconversation.com/files/483806/original/file-20220909-18-r1e0v8.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483806/original/file-20220909-18-r1e0v8.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483806/original/file-20220909-18-r1e0v8.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483806/original/file-20220909-18-r1e0v8.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483806/original/file-20220909-18-r1e0v8.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483806/original/file-20220909-18-r1e0v8.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483806/original/file-20220909-18-r1e0v8.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Bank of Canada has raised its interest rate for the fifth time since the beginning of the year.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span>
</figcaption>
</figure>
<p>In Canada, this restoration has involved the unprecedented increases in the Bank of Canada’s policy rate that have taken place since the beginning of the year.</p>
<p>Curiously, other countries that are facing the same supply chain problems and higher energy prices as us are not struggling with inflation as high as ours. For example, the inflation rate in <a href="https://www.thelocal.ch/20220704/inflation-in-switzerland-hits-3-4-percent-for-june/">Switzerland is 3.4 per cent</a>, <a href="https://www.wsj.com/articles/bank-of-japan-sees-inflation-hitting-2-3-this-fiscal-year-11658373778">in Japan is 2.3 per cent</a>, and <a href="http://english.www.gov.cn/archive/statistics/202009/09/content_WS5f5836b7c6d0f7257693bb79.html">in China is 2.4 per cent</a>. But why this is the case is another conversation entirely.</p><img src="https://counter.theconversation.com/content/190219/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Apostolos Serletis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Bank of Canada’s expansionary monetary policy in 2021 is an important source of the high inflation we are experiencing today.Apostolos Serletis, Professor of Economics, University of CalgaryLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1889592022-08-18T19:25:43Z2022-08-18T19:25:43ZAn economist explains: What you need to know about inflation<figure><img src="https://images.theconversation.com/files/479711/original/file-20220817-11729-7y5aga.jpg?ixlib=rb-1.1.0&rect=0%2C7%2C4955%2C3315&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A number of factors have contributed to the recent rise in inflation, including supply chain disruptions, the Russian invasion of Ukraine and labour shortages.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/an-economist-explains--what-you-need-to-know-about-inflation" width="100%" height="400"></iframe>
<p>Inflation is one of the most pressing political and economic issues of the moment, but there are many misconceptions about how inflation is measured, where it comes from and how it impacts the average person. </p>
<p>In June, inflation in Canada reached a <a href="https://www.cbc.ca/news/business/canada-inflation-rate-1.6526060">40-year high of 8.1 per cent</a>. While there are <a href="https://www.cbc.ca/news/business/inflation-rate-july-1.6552298">signs inflation may be moderating</a>, many Canadians have dealt with the surging cost of living by <a href="https://www.cbc.ca/news/business/canadians-cutting-back-ari-study-1.6500505#">cutting back on expenses</a>, <a href="https://www.msn.com/en-ca/money/other/canadians-delaying-retirement-amid-surging-inflation-poll-finds/ar-AAYB2pY">working more to increase their income, drawing on their savings or taking on more debt</a>. </p>
<p>As an economics professor who conducts research on prices and consumption, I would like to provide some insight into how inflation is measured and how it is impacting Canadians and the economy at large. </p>
<h2>What is inflation?</h2>
<p>Inflation refers to a general increase in prices and the resulting decline in the purchasing power of money. While most of us can sense whether inflation is high or low from everyday purchases, <a href="https://www.statcan.gc.ca/en/subjects-start/prices_and_price_indexes/consumer_price_indexes">the inflation rate that gets reported in the press and discussed by policy-makers</a> is a specific measure created by a small army of statisticians and data collectors. </p>
<p><a href="https://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getSurvey&SDDS=2301&lang=en&db=imdb&adm=8&dis=2">Statistics Canada constructs the Consumer Price Index (CPI)</a> used to track inflation through a two-step process. In the first step, Statistics Canada collects over one million price quotes on virtually anything purchasable in the country. </p>
<p>Prices are recorded in a variety of ways, and the frequency and geography of price collection depends on the item. For example, items with prices that change quickly like food or gasoline, or vary across locations like rent, are collected more frequently than items that are collected once a year, like university tuition or insurance rates.</p>
<figure class="align-center ">
<img alt="Gas prices are displayed behind a close up shot of a gas pump" src="https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=492&fit=crop&dpr=1 754w, https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=492&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/479708/original/file-20220817-22-k2gdfb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=492&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">While constructing the Consumer Price Index, Statistics Canada collects price quotes on items with prices that change quickly, like gas, more frequently than items with steadier prices, like insurance.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span>
</figcaption>
</figure>
<p>In the second step, Statistics Canada aggregates these prices to generate the all-item Consumer Price Index by weighing each item’s price change by its share of total consumer spending. These weights are occasionally updated to <a href="https://www150.statcan.gc.ca/n1/pub/62f0014m/62f0014m2022009-eng.htm">reflect changes in consumer spending patterns</a>. </p>
<p>The most recent update in 2021 reflects some pandemic-related spending changes, such as a lower weight for food (15.75 per cent) and transportation (16.16 per cent), but a higher weight for shelter (29.67 per cent). </p>
<p>Statistics Canada and the Bank of Canada also measure “<a href="https://www.statcan.gc.ca/en/statistical-programs/document/2301_D64_T9_V2">core inflation</a>” which removes items with the most volatile prices (food and energy) from the CPI to provide a better sense of slower-moving, long-term cost pressures.</p>
<h2>What causes inflation?</h2>
<p>Prices are determined by <a href="https://www.britannica.com/topic/supply-and-demand">supply and demand</a>. High inflation is a sign that, across the economy, demand for goods and services exceeds their supply. </p>
<p>Demand has been strong due to <a href="https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.economic-indicators.scotia-flash.-december-3--2021-.html">strong employment and wage growth</a>, <a href="https://www.ctvnews.ca/business/hot-inflation-opens-rare-attack-on-bank-of-canada-1.5959770">cheap credit</a>, <a href="https://www.ctvnews.ca/politics/stimulus-not-the-cause-of-canada-s-inflation-problem-says-former-bank-of-canada-governor-1.5683699">pandemic-related payments from governments</a> and <a href="https://www.mckinsey.com/business-functions/growth-marketing-and-sales/our-insights/the-great-consumer-shift-ten-charts-that-show-how-us-shopping-behavior-is-changing">pandemic-related shifts in demand towards goods consumed at home</a>. </p>
<p>Supply has been disrupted by the pandemic’s effects on <a href="https://www.reuters.com/world/china/chinas-factories-opt-isolation-bubbles-beat-covid-curbs-keep-running-2022-03-17/">Chinese factories</a>, <a href="https://theconversation.com/why-are-prices-so-high-blame-the-supply-chain-and-thats-the-reason-inflation-is-here-to-stay-169441">international supply chains</a>, <a href="https://unctad.org/news/shipping-during-covid-19-why-container-freight-rates-have-surged">container shipping</a>, <a href="https://www.vox.com/22841783/truck-drivers-shortage-supply-chain-pandemic">trucking</a> and the Russian invasion of Ukraine that <a href="https://www.cnbc.com/2022/04/13/russia-ukraine-war-threatens-billions-un-warns-as-food-energy-prices-soar.html">led to recent spikes in food and energy prices</a> around the world. </p>
<h2>Inflation feels higher than it is</h2>
<p>Many Canadians <a href="https://www150.statcan.gc.ca/n1/pub/62f0014m/62f0014m2021017-eng.htm">feel like prices rose by more than 8.1 per cent</a> in the last year. Beyond <a href="https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.economic-indicators.scotia-flash.-december-15--2021-.html">specific criticism of the CPI methodology in Canada</a>, there are at least two reasons for this. </p>
<p>First, consumer spending is measured through surveys that capture the diversity of spending patterns in the population, but collapse this diversity into a single set of weights that treats each dollar of spending equally. <a href="https://www150.statcan.gc.ca/n1/daily-quotidien/210122/dq210122b-eng.htm">Spending patterns vary</a> with age, income, location, household composition and taste, and your personal budget might bear little resemblance to the weights used for the CPI. </p>
<p>Second, we are more likely to <a href="https://www150.statcan.gc.ca/n1/en/pub/11-621-m/11-621-m2010084-eng.pdf?st=XOSSrt4k">notice price changes for items we purchase frequently</a>, and we <a href="https://www.bankofcanada.ca/2020/08/perceived-inflation-reality-understanding-the-difference/">tend to notice price increases more than decreases</a>. The items with the highest price increases in the last year — energy and food — have these characteristics, and we are less likely to notice the (lower) inflation rate for furniture, electronics, education and health goods that balance these out. </p>
<figure class="align-center ">
<img alt="Cereals and cereal products displayed for sale at a grocery store" src="https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/479710/original/file-20220817-12158-ynmg73.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">We tend to notice price increases for items we purchase frequently, like groceries.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span>
</figcaption>
</figure>
<p>We also pay a lot of attention to soaring house prices and interest rates — especially in big cities — but the <a href="https://www.bcbc.com/insights-and-opinions/how-do-house-prices-affect-the-consumer-price-index#_ftn7">cost of owned accommodation in the CPI</a> is based on historical averages of housing prices (25 years) and interest rates (five years) that reflect long-term financing costs for the average homeowner, not someone buying a house today.</p>
<h2>How does inflation impact us?</h2>
<p>There are <a href="https://www.economicshelp.org/blog/145181/inflation/who-are-the-winners-and-losers-from-inflation/">winners and losers</a> when it comes to inflation. While it can hurt businesses that <a href="https://montreal.ctvnews.ca/first-the-pandemic-now-inflation-quebec-s-small-businesses-are-slammed-again-1.5910932">end up passing cost increases onto their customers</a>, it can <a href="https://www.thestar.com/business/2022/07/09/supermarkets-are-hiking-prices-faster-than-necessary-and-profiting-from-inflation-star-investigation-suggests.html">benefit others</a> by allowing them to <a href="https://direct.mit.edu/rest/article-abstract/99/1/151/58363/Market-Structure-and-Cost-Pass-Through-in-Retail?redirectedFrom=fulltext">raise their prices</a> without customer backlash because “everyone else is doing it.” </p>
<p>High inflation is <a href="https://www.stlouisfed.org/on-the-economy/2022/feb/relationship-wage-growth-inflation-one-recession-later">often, but not always, accompanied by high wage growth</a>. Individuals who earn no or below-inflation wages are hurt, while individuals with wages indexed to inflation or <a href="https://globalnews.ca/news/8332153/wage-inflation-bank-of-canada/">who are able to negotiate better wages</a> can benefit. Individuals like seniors on fixed incomes are often hurt by inflation, although many <a href="https://www.canada.ca/en/department-finance/news/2022/06/deputy-prime-minister-outlines-governments-affordability-plan-for-canadians.html">government benefits are indexed to inflation</a>. </p>
<p>Some asset prices are better at keeping pace with inflation. Prices of housing, stocks, art and precious metals may go up, while assets with fixed dollar values like cash and bonds do not. </p>
<p>Inflation can make it easier to repay debts, as long as wages or other asset prices keep pace. Inflation <a href="https://budgetmodel.wharton.upenn.edu/issues/2021/10/21/can-inflation-offset-government-debt">can also benefit government finances as tax revenues rise</a> relative to the dollar value of the debt. </p>
<p>While the source of our current inflation is irrelevant to consumers, it matters for economic policy. Central banks and governments must decide whether to curb demand and risk recession <a href="https://www.ctvnews.ca/business/economists-predict-a-mild-recession-but-what-would-that-look-like-in-canada-1.6027857">by raising interest rates</a>, cutting spending or raising taxes, or wait and hope that supply-side inflation pressures ease up on their own. </p>
<p>We can only hope that it will not take a major recession to end this period of high inflation (unlike the <a href="https://www.bnnbloomberg.ca/bank-of-canada-ready-to-tighten-like-the-1990s-1.1751318">last major effort by the Bank of Canada to lower inflation</a>) and that Canada avoids “<a href="https://theconversation.com/1970s-style-stagflation-now-playing-on-central-bankers-minds-185868">stagflation</a>,” the combination of high inflation and high unemployment that afflicted many economies in the late 1970s.</p><img src="https://counter.theconversation.com/content/188959/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicholas Li does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An economist provides insight into how inflation is measured, where it comes from and how it is impacting Canadians and the economy at large.Nicholas Li, Assistant Professor, Department of Economics, Toronto Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1885722022-08-12T12:37:22Z2022-08-12T12:37:22ZWorried about back-to-school inflation? Latest price data on backpacks, laptops and kids’ clothes offers some relief for parents<figure><img src="https://images.theconversation.com/files/478832/original/file-20220811-19-geqa37.jpg?ixlib=rb-1.1.0&rect=42%2C36%2C3983%2C2981&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">While laptops have dropped in price, old-school supplies like pencils and markers are getting more expensive. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BacktoSchoolInflation/571d8a959d874132a8c052bb6222eb01/photo?Query=back%20to%20school%20inflation&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=22&currentItemNo=5">AP Photo/Marta Lavandier</a></span></figcaption></figure><p>As summer draws to a close, it is time for many to think about back-to-school shopping, such as notebooks, backpacks and new clothes.</p>
<p>As an <a href="http://businessmacroeconomics.com/">economist</a> who has studied consumer prices for years, I wondered how <a href="https://blogs.imf.org/2022/08/01/soaring-inflation-puts-central-banks-on-a-difficult-journey/">soaring inflation</a> was affecting the costs of typical back-to-school gear. </p>
<p><a href="https://www.bls.gov/news.release/pdf/cpi.pdf">Consumer prices rose</a> by about 8.5% in July from a year earlier, according to the latest data released on Aug. 10, 2022. But this figure is only an average. The <a href="https://www.bls.gov/news.release/cpi.t02.htm">price of some items</a>, like airline fares and gasoline, has jumped a lot more than that, while the cost of other items, like the price of televisions and phones, have actually fallen.</p>
<p>To determine how the cost of paying for what school children need has changed, I tracked two sets of prices: First, the cost of back-to-school necessities. Second, the price of school lunches – since learning on an empty belly is hard. </p>
<h2>Clothes and backpacks</h2>
<p>Children often seem to <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3568055/">sprout during summer vacation</a>. This growth typically means they need new clothes for fall’s cooler weather. The U.S. government’s consumer price index has been following the price of both girls’ and boys’ clothes since 1977.</p>
<p>Government data shows the price of girls’ clothing peaked in 1992. The price of boys’ clothes peaked six years later, in 1998. Not only are clothes cheaper today than they were in the 1990s, but over the last 12 months prices for girls’ clothes have increased by less than 2% – compared with overall inflation of 8.5%. The price of boys’ clothes, however, jumped almost 5% last year.</p>
<p>Going back to school also means new shoes, since kids’ feet grow too. The <a href="https://www.bls.gov/news.release/cpi.t02.htm">average price for boys’ and girls’ footwear</a> has risen steadily since 1977. In the past year, the price of shoes and sneakers climbed by almost 8%.</p>
<p>As for school supplies, inflation has been a mixed bag. The price of notebooks and paper has soared in the past year, by 11%. And while the consumer price index doesn’t track pencils, markers and crayons, its close cousin, the <a href="https://www.bls.gov/ppi/">producer price index</a>, shows retailers are paying 11% more than they did last year for pencils and markers, while <a href="https://fred.stlouisfed.org/series/PCU3399403399402">art supplies</a> have climbed almost 18%.</p>
<p>The prices of backpacks, on the other hand, increased at a much slower pace, up about 4% in July 2022 from 12 months earlier. And if your child needs a new laptop or tablet, you’re in luck. The <a href="https://fred.stlouisfed.org/series/CUSR0000SEEE01">price of computers</a> has actually fallen by almost 4% from July 2021.</p>
<p>Putting these categories together into an equally weighted index suggests the cost of going back to school won’t hurt your wallet as much as parents might fear. My back-to-school index rose about 5.1% in July from a year earlier.</p>
<p>The index also shows prices are virtually unchanged from about a decade ago. This is small consolation for parents who didn’t have students in school 10 years ago. However, it does show that the prices of back to school items are not always increasing.</p>
<p><iframe id="eQ5pg" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/eQ5pg/4/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>School lunches</h2>
<p>Another major cost when going back to school is buying lunch in school cafeterias. </p>
<p>Pre-pandemic data suggests <a href="https://progressivegrocer.com/npd-64-percent-students-will-buy-school-lunches">close to two-thirds of students</a> were buying lunch at school. Consumer price data shows the cost of food in urban elementary and secondary school cafeterias was down 43% in May 2022 from a year earlier – the latest figures available. </p>
<p>In fact, the index level is about the lowest since the index began tracking the data in 2005, primarily because there was <a href="https://theconversation.com/schools-will-stop-serving-free-lunch-to-all-students-a-pandemic-solution-left-out-of-a-new-federal-spending-package-179058">universal free lunch</a> during parts of the pandemic. That <a href="https://www.forbes.com/sites/darreonnadavis/2022/07/22/universal-free-school-lunches-will-end-soon-after-cuts-to-pandemic-era-spending/?sh=519f89474c11">program has now ended</a>, though some states are stepping in, so lunch costs are likely to climb in most school districts in the coming year.</p>
<p>For families who prefer to pack school lunches for their children, the data looks much worse. The average price of food purchased for home preparation <a href="https://fred.stlouisfed.org/series/CUSR0000SAF11#0">surged 13.1% in July</a> from a year earlier, the fastest pace of inflation since 1979. </p>
<p>But since that may not reflect the actual cost of the food in a child’s lunchbox, I did my own calculation based on what my mother packed for me when I was a kid: peanut butter and jelly sandwiches, which remains a staple today – though not for my children. </p>
<p>My lunchbox typically consisted of a PB&J sandwich on white bread, apple slices, a few baby carrots, a bag of potato chips, 8 ounces of milk and a chocolate chip cookie - to keep me happy. Using the U.S. Department of Agriculture’s <a href="https://foodbuyingguide.fns.usda.gov/">school lunch buying guide</a>, I found the portions that would provide about 666 calories, a touch more than <a href="https://www.dietaryguidelines.gov/sites/default/files/2021-03/Dietary_Guidelines_for_Americans-2020-2025.pdf">recommended by the government</a>. My personal lunchbox index jumped by over 13%.</p>
<p>That was mainly driven by the jump in the <a href="https://fred.stlouisfed.org/series/APU0000702111">price of bread</a>, peanut butter, <a href="https://fred.stlouisfed.org/series/APU0000709112">milk</a> and potato chips, which all climbed by more than 14%.</p>
<h2>Choosy shopping</h2>
<p>While most prices for going back to school are rising more than usual, there are still bargains to be found, such as in children’s clothing and computers. </p>
<p>Or in the lunchbox example, you could add more apples, whose price has climbed only about 5%. Including more apple slices could not only ease your wallet but also improve your child’s nutrition.</p>
<p>Prices on most goods may be a lot higher than a year ago, but it’s important to remember that not everything is undergoing sky-high inflation. With careful shopping, even families on a tight budget can find what they need at a price they can afford.</p><img src="https://counter.theconversation.com/content/188572/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Inflation is soaring, but prices for typical back-to-school gear like backpacks, computers and new clothes are rising less than average – or even falling.Jay L. Zagorsky, Senior Lecturer in Markets, Public Policy and Law, Questrom School of Business, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1879732022-08-03T20:05:14Z2022-08-03T20:05:14ZInflation isn’t what they say it is – for many of us, it is much lower<figure><img src="https://images.theconversation.com/files/477380/original/file-20220803-15-lg21ck.png?ixlib=rb-1.1.0&rect=11%2C431%2C2994%2C1353&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>We learnt last week inflation is officially <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">6.1%</a> – way above the average over the past 20 years of 2.5%. This is right in the middle of the Reserve Bank’s 2-3% target band.</p>
<p>But although the rate is now 6.1%, not everybody faces it. It depends on what you buy.</p>
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<p>And there’s one big anomaly right now. </p>
<p>The “basket” of goods and services whose prices the Bureau of Statistics uses to work out the consumer price index is dominated by one item, one most Australians rarely buy.</p>
<p>It is what the bureau calls “new dwelling purchase by owner-occupiers”. </p>
<p>This is mostly the cost of building a new home (excluding the cost of the land) and also the cost of major renovations, but not repairs.</p>
<h2>We rarely build a house, and rarely pay up front</h2>
<p>Even though very few Australians pay this cost in any given year, and some never pay it, it makes up almost 9% of the total basket, a heavier weight than any other single item in the Consumer Price Index.</p>
<p>By way of comparison, bread – a product most households buy every day – makes up only 0.53% of the index. “New dwelling purchase” makes up <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/annual-weight-update-cpi-and-living-cost-indexes/2021">8.67%</a>.</p>
<p>New dwelling purchase gets such a big weight because it is so expensive, sometimes as much as half a million dollars or more. Like most other items in the consumer price index, bread is cheaper.</p>
<h2>We buy bread more often, but it scarcely counts</h2>
<p>Normally when the price of “new dwelling purchase” isn’t moving by much (or by much more than other prices) it doesn’t much move the index.</p>
<p>But material and labour shortages mean that over the past year alone, the cost of new dwelling purchase has jumped by more than 20%. In the June quarter it was responsible for almost a third – 0.5 points – of the 1.8% increase in the entire consumer price index.</p>
<p>If your interest is the change in household cost of living, the inclusion of the cost of buying a new house is a problem as the very few people who pay it mostly don’t pay it upfront. They take out a loan which they pay off slowly. </p>
<h2>Measured differently, costs didn’t rise 6.1%</h2>
<p>Before 1998 the bureau used a different so-called “outlays” approach to measuring inflation that measured payments made to gain access to goods and services. </p>
<p>The resulting weight of housing in the index was much lower.</p>
<p>The bureau still uses the outlays method to calculate separately-published living cost indexes <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/selected-living-cost-indexes-australia/jun-2022">published on Wednesday</a>.</p>
<p>Using these indexes, ANU modelling suggests about 80% of households had a living cost increase below the consumer price index of 6.1%.</p>
<p>The median (typical) increase over the past year is 4.7%, meaning half of households had increases in living costs below 4.7%. </p>
<h2>Half of us faced less than 4.7%</h2>
<p>Among the households whose living costs have climbed by less than 6.1% would be almost all of those headed by people on the JobSeeker unemployment benefit.</p>
<p>The cost of living for these households climbed by 5%.</p>
<p>Yet in September this year the benefit will increase in total by the increase in the consumer price index, meaning that for once the living standards of households receiving those benefits will move ahead.</p>
<p>Wage earner living costs have increased by just 4.6%, suggesting wage increases in line with the consumer price index would also leave them ahead.</p>
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Read more:
<a href="https://theconversation.com/inflation-hasnt-been-higher-for-32-years-what-now-187452">Inflation hasn't been higher for 32 years. What now?</a>
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<p>Our modelling suggests high income families suffered a cost of living increase of only 4.5%, compared to 4.9% for lower income families.</p>
<p>For the moment, the lower <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/selected-living-cost-indexes-australia/jun-2022">living cost indexes</a> are a better guide to changes in the cost of living than the <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">consumer price index</a>.</p>
<p>In time, as the increases in the cost of new dwellings subside, the difference will become less stark. Indeed, as mortgage rates increase over the year growth in the living cost indexes might exceed the consumer price index.</p>
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Read more:
<a href="https://theconversation.com/whats-in-the-cpi-and-what-does-it-actually-measure-165162">What's in the CPI and what does it actually measure?</a>
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<img src="https://counter.theconversation.com/content/187973/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ben Phillips does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>ANU modeling suggests 80% of households face living cost increases below the inflation rate of 6.1%.Ben Phillips, Associate Professor, Centre for Social Research and Methods, Director, Centre for Economic Policy Research (CEPR), Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1851822022-06-23T11:49:46Z2022-06-23T11:49:46ZYes, fireworks prices are skyrocketing, but there should be plenty of bottle rockets and sparklers for you and your family this Fourth of July<figure><img src="https://images.theconversation.com/files/470366/original/file-20220622-11-s24h2i.jpg?ixlib=rb-1.1.0&rect=25%2C33%2C5608%2C3716&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Many cities, such as New York, returned to hosting big public displays in 2021 after skipping 2020 due to the pandemic. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/JulyFourthNewYork/2a6c66b8bd0a4adfba9e27fc7446bf0f/photo?Query=fireworks%20July%20&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=3302&currentItemNo=210">AP Photo/John Minchillo</a></span></figcaption></figure><p>If you’re looking forward to shooting off bottle rockets and Roman candles this Fourth of July, I’ve got good news and bad news.</p>
<p>The bad is that fireworks prices are soaring this year <a href="https://www.bls.gov/news.release/cpi.nr0.htm">along with pretty much everything else</a>. The good news, however, is that at least you don’t need to worry about a shortage - there should be plenty of rockets, fountains and sparklers to go around. </p>
<p>I’m <a href="http://businessmacroeconomics.com/">an economist</a> who has been following the <a href="https://theconversation.com/why-are-so-many-people-lighting-off-fireworks-141521">fireworks</a> <a href="https://theconversation.com/americas-dangerous-love-for-pyrotechnics-4-facts-about-fireworks-80181">industry</a> for <a href="https://theconversation.com/men-suffer-about-70-percent-of-fireworks-injuries-and-other-4th-of-july-facts-98737">years</a>. Despite <a href="https://fred.stlouisfed.org/series/WPS067902">soaring wholesale prices</a>, I believe the latest data suggests you may be able to beat inflation and snag some fireworks deals - if you’re patient.</p>
<h2>Fireworks imports at a record</h2>
<p>Fireworks were <a href="https://www.americanpyro.com/history-of-fireworks">first invented in China over 2,000 years ago</a>. Today, that’s where most of the world’s fireworks still come from.</p>
<p>China <a href="https://comtrade.un.org/">has been responsible for 87%</a> of the world’s fireworks exports since 2010. Much of these are low-priced mass market products, like <a href="https://www.americanpyro.com/glossary-of-pyrotechnic-terms">firecrackers</a> and <a href="https://www.celebratesafely.org/kinds-of-fireworks">Roman candles</a>, the kind you’ll find at your local <a href="https://fireworks.com/">fireworks store</a>. </p>
<p>In the U.S., regular people – as opposed to professional pyrotechnicians – typically light off the most fireworks around the Fourth of July, and so businesses import large amounts well in advance of the holiday to ensure a large supply.</p>
<p>The U.S. <a href="https://dataweb.usitc.gov/">imported 185 million pounds</a> of fireworks, mostly from China, in the first four months of 2022, the latest data available. That’s already 27% ahead of last year’s record pace. And this doesn’t even include figures for May and June, the two months that usually account for the biggest volumes in a typical year.</p>
<p>The figures include about 5.5 million pounds of fireworks for professional displays - which means that all but about 3% of these imports are intended for private consumer use. The 179 million pounds aimed at consumers already equates to over half a pound of fireworks for <a href="https://www.census.gov/popclock/">every man, woman and child living in the U.S</a> - with more on the way. In all of 2021, the U.S. imported a record 1.25 pounds of fireworks per person. </p>
<p>More expensive fireworks for the expansive public displays cities typically put on come <a href="https://usitc.gov/">from countries like</a> the Netherlands, Germany, Spain, Poland and the U.S. </p>
<p>American manufacturers, which produce an <a href="https://www.americanpyro.com/assets/docs/FactsandFigures/2022/Fireworks%20Consump.%20Figures%202000-2021.pdf">estimated 6.7 million pounds of fireworks a year</a>, <a href="https://www.thomasnet.com/articles/top-suppliers/fireworks-manufacturers-and-suppliers/">focus on designing the more sophisticated rockets</a> for big public displays, and often help orchestrate them. </p>
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<h2>Consumer demand likely to fall</h2>
<p>But there’s reason to believe consumer demand might actually be lower than usual this year. </p>
<p>In 2020, most public displays were canceled to avoid encouraging large crowds that <a href="https://www.cnn.com/travel/article/new-years-eve-2021-celebrations-cancellations-pandemic/index.html">might spread the coronavirus</a>. <a href="https://theconversation.com/why-are-so-many-people-lighting-off-fireworks-141521">As a result, Americans</a> <a href="https://news.wttw.com/2020/07/03/more-fireworks-americans-hands-july-4-raises-risks">were lighting off a lot more</a> fireworks in backyards and city streets than usual - <a href="https://www.nytimes.com/2020/06/19/nyregion/fireworks-every-night-nyc.html">often illegally</a>. </p>
<p>Public displays <a href="https://abc7ny.com/macys-fireworks-2021-where-to-watch-macys-when-are-the/10851940/">began returning in 2021</a>, and <a href="https://www.rd.com/list/independence-day-fireworks-each-state/">more are expected in 2022</a>. That’s translating into a surge of professional fireworks imports, though they still remain well below pre-pandemic levels. </p>
<p>But the return of large displays will likely reduce demand from more casual users since it is hard to go to a professional show and light off lots of small fireworks at the same time. And <a href="https://droughtmonitor.unl.edu">severe drought in large swaths of the U.S.</a> should further damp consumer demand as <a href="https://www.governor.state.nm.us/2022/04/25/governor-urges-local-restrictions-on-fireworks-due-to-wildfires-drought-conditions/">officials urge cities</a> to restrict the use of fireworks to <a href="https://www.csmonitor.com/USA/2021/0628/No-fireworks-for-Fourth-of-July-Western-drought-dries-up-plans">avoid sparking wildfires</a>.</p>
<h2>That means prices should … rise?</h2>
<p>Basic economics tells us that when supply is high and demand is low, <a href="https://www.investopedia.com/terms/l/law-of-supply-demand.asp">prices should go down</a>. The data available suggests otherwise, thanks to the <a href="https://apnews.com/article/key-inflation-report-highest-level-in-four-decades-c0248c5b5705cd1523d3dab3771983b4">fastest pace of inflation</a> in over 40 years.</p>
<p><a href="https://usitc.gov/">Importers paid an average of US$1.30 per pound</a> for fireworks in the first four months of the year, a 15% increase from 2021 - or <a href="https://www.bls.gov/news.release/cpi.nr0.htm">close to double the overall rate of inflation</a>. </p>
<p>Unfortunately, the consumer price index doesn’t have detailed data on the cost people are actually shelling out for retail fireworks. But there is data on the price producers are paying for explosives, propellants and blasting accessories, which include fireworks. The latest data, for May 2022, <a href="https://fred.stlouisfed.org/series/WPS067902">shows prices were up 11%</a> from a year earlier.</p>
<p>And there’s reason to believe the amount retailers ultimately charge for fireworks will go up even more after factoring in the <a href="https://beta.bls.gov/dataViewer/view/timeseries/WPU30">soaring cost of transporting goods</a>, <a href="https://www.americanpyro.com/assets/docs/SPARKs/Fireworks%20Industry%20Braces%20for%20a%20Challenging%20Season.pdf">higher insurance premiums</a> and <a href="https://www.marketwatch.com/story/rising-wages-and-labor-shortage-threaten-u-s-effort-to-tame-inflation-quickly-11652729893">rising labor costs</a>. </p>
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<h2>Be patient and stay safe</h2>
<p><a href="https://www.americanpyro.com/assets/docs/SPARKs/Fireworks%20Industry%20Braces%20for%20a%20Challenging%20Season.pdf">It seems likely that retailers</a> beleaguered by pandemic-related supply chain problems in everything from <a href="https://www.cnn.com/2020/07/24/perspectives/keeping-coins-shortage/index.html">coins</a> and <a href="https://theconversation.com/theres-plenty-of-toilet-paper-so-why-are-people-hoarding-it-133300">toilet paper</a> to <a href="https://www.hhs.gov/formula/index.html">baby formula</a> and even <a href="https://www.nytimes.com/2021/01/29/business/grape-nuts-shortage.html">Grape-Nuts cereal</a> simply placed big fireworks orders as early as they could. </p>
<p>But I think it’s likely that this will lead to a glut in supply, and fireworks peddlers will be saddled with too many rockets for too little demand and may have to eventually lower the price to entice inflation-weary consumers. </p>
<p>So if you’re planning to shoot off fireworks as part of your Fourth of July celebrations, there’s probably no need to hoard them the way many people stocked up on <a href="https://theconversation.com/theres-plenty-of-toilet-paper-so-why-are-people-hoarding-it-133300">toilet paper</a> or <a href="https://www.hhs.gov/formula/index.html">baby formula</a>. In fact, you might benefit from waiting and taking advantage of better deals closer to July 4. </p>
<p>One note of caution, though: Use common sense when lighting your rockets and candles, especially if children are around. <a href="https://www.cpsc.gov/Newsroom/News-Releases/2021/Fireworks-Related-Injuries-and-Deaths-Spiked-During-the-COVID-19-Pandemic">Thousands of people in the U.S. are injured</a> from fireworks every year, and some even die. <a href="https://www.nfpa.org/Public-Education/Fire-causes-and-risks/Seasonal-fire-causes/Fireworks">Per-capita injuries spiked</a> during the pandemic after decades of declines. </p>
<p>It’s also smart to pay attention to how fireworks affect nearby pets and <a href="https://theconversation.com/every-dog-has-its-day-but-its-not-the-fourth-of-july-119712">take some precautions</a> to protect them. </p>
<p>Whether you are lighting fireworks, watching them illuminate the night sky or just <a href="http://forums.webmd.com/3/anxiety-and-panic-disorders-exchange/forum/4777">hiding from the noise</a>, I wish all of you a happy Independence Day.</p><img src="https://counter.theconversation.com/content/185182/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The latest data shows imports of bottle rockets, sparklers and other fireworks at a record pace, even as consumer demand appears likely to wane. That could create opportunities for patient revelers.Jay L. Zagorsky, Senior Lecturer in Markets, Public Policy and Law, Questrom School of Business, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1844652022-06-13T13:30:04Z2022-06-13T13:30:04ZRising food prices hit poor people the hardest: a close look at inflation in South Africa<figure><img src="https://images.theconversation.com/files/467452/original/file-20220607-13060-c589y0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Food prices in South Africa are rising.</span> <span class="attribution"><span class="source">Photo by Chen Cheng/Xinhua via Getty Images</span></span></figcaption></figure><p>Concerns about rising food prices are making the headlines across the world as pressures mount in the wake of Russia’s invasion of Ukraine. The war has <a href="https://www.theguardian.com/global-development/2022/apr/08/global-food-prices-rise-to-highest-ever-levels-after-russian-invasion-ukraine-wheat">driven up prices of commodities</a>, including wheat, which is a staple food in many countries.</p>
<p>Food inflation has recently been attracting <a href="https://businesstech.co.za/news/lifestyle/581870/food-prices-in-south-africa-continue-to-soar-and-worse-is-still-to-come/#:%7E:text=Year%2Don%2Dyear%2C%20basket,inflation%20was%20recorded%20at%206.7%25">a lot of media attention</a> in South Africa too as concerns grow about people’s ability to afford basic foodstuffs.</p>
<p>Food price inflation attracts considerable attention because we must all eat. And periods of high food inflation affect poor households the most. This is because they spend a higher percentage of their income on food. </p>
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<a href="https://theconversation.com/inflation-should-be-viewed-as-public-enemy-number-1-heres-why-183193">Inflation should be viewed as public enemy number 1: here's why</a>
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<p>When it comes to price rises of general products, households can simply refrain from buying non-essentials. But this isn’t true when it comes to food. The only choice for households is to substitute expensive food with cheaper alternatives or to buy less, and reduce the amount of food that’s put on the table.</p>
<p>Governments, central bankers, academics and businesses consider and assess inflation in detail. But we should all be interested because high inflation and high food inflation in particular, can result in considerable hardship.</p>
<h2>How inflation is calculated</h2>
<p>South Africa’s overall rate of inflation in March 2022 (compared to March 2021) was <a href="http://www.statssa.gov.za/publications/P0141/P0141March2022.pdf">5,9%</a>. The rate of increase in the prices of food and non-alcoholic beverages was higher – at 6,2% over the same period. </p>
<p>This difference was even <a href="https://businesstech.co.za/news/trending/572786/here-are-21-grocery-items-in-south-africa-that-are-more-expensive-in-2022/">more pronounced</a> in February 2022 (compared to February 2021), when overall inflation was 5,7%, but food inflation was 6,7%.</p>
<p>The implication of this is that food prices are increasing faster than overall inflation. This impacts heavily on poor households. High food price inflation makes poor people even poorer. </p>
<p>According to <a href="https://tradingeconomics.com/south-africa/food-inflation#:%7E:text=Food%20Inflation%20in%20South%20Africa,percent%20in%20June%20of%202010">Trading Economics</a>, South Africa’s <a href="https://tradingeconomics.com/south-africa/food-inflation#:%7E:text=Food%20Inflation%20in%20South%20Africa,percent%20in%20June%20of%202010">average food price</a> inflation was 6,07% per annum between 2009 and 2022, reaching for this period its <a href="https://tradingeconomics.com/south-africa/food-inflation#:%7E:text=Food%20Inflation%20in%20South%20Africa,percent%20in%20June%20of%202010">highest level of increase of</a> 15,6% in February 2009 (compared to February 2008). </p>
<p>South Africa’s inflation <a href="https://www.statssa.gov.za/?cat=33&gclid=EAIaIQobChMI88DZ25aR-AIVCUFIAB1pYgRmEAAYASAAEgJFOvD_BwE">calculations</a> are based on the rate of change in the consumer price index (CPI). Both the CPI and the rate of inflation are calculated by Statistics SA (Stats SA).</p>
<p>It <a href="http://www.dpru.uct.ac.za/sites/default/files/image_tool/images/36/DPRU%20WP07-129.pdf">calculates inflation rates</a> for the country’s nine provinces, for different income groups and for different demographic groups, for instance pensioners. These differentiated calculations are necessary because household spending patterns differ by region as well as by income and demography.</p>
<p>These different rates have various uses. For instance, the inflation rates per income decile give an indication of price changes affecting different income groups. The rate of inflation calculated for pensioners is sometimes used as a basis for pension adjustments. </p>
<p>The inflation rates per province is used by businesses with a national footprint to assess financial performance and cost pressures of operations in different provinces. </p>
<p>For the purpose of public communication, policy decisions and international comparison, one rate of inflation is calculated and published for the country. This single rate is what gets media attention. </p>
<p>StatsSA calculates this overall rate based on the rate of change in the headline CPI <a href="http://www.statssa.gov.za/publications/P0141/P0141January2022.pdf">for all urban areas</a>. This figure is used for international inflation comparisons between countries. It’s also used internally for policy decisions made by the South African Reserve Bank. The central bank has an <a href="https://www.resbank.co.za/en/home/what-we-do/monetary-policy">inflation target</a> with the aim of keeping headline inflation <a href="https://www.resbank.co.za/en/home/what-we-do/monetary-policy#:%7E:text=Inflation%20Targeting%20Framework&text=South%20Africa's%20inflation%20target%20range,approach%20has%20been%20more%20successful">between 3% and 6% per annum</a>. </p>
<p>The headline rate of inflation also <a href="https://www.resbank.co.za/en/home/what-we-do/monetary-policy">often serves</a> as the base for wage adjustment negotiations.</p>
<p>Other than Stats SA, there are also other civil society initiatives focusing on calculations of South African price increases. The best-known in the area of food price increases is the <a href="https://pmbejd.org.za/">Economic Justice and Dignity group</a> in Pietermaritzburg. Every month it publishes the prices of a “food basket” and calculates <a href="https://businesstech.co.za/news/lifestyle/581870/food-prices-in-south-africa-continue-to-soar-and-worse-is-still-to-come/#:%7E:text=Year%2Don%2Dyear%2C%20basket,inflation%20was%20recorded%20at%206.7%25">the rate of increase</a> in the items included in this basket. </p>
<p>The rates of increase in food prices calculated by Stats SA and by the justice group differ because they include different items and different spending weights per item in their respective “food baskets”.</p>
<p>StatsSA includes in its <a href="https://www.statssa.gov.za/publications/P0141/P0141March2022.pdf">“food basket”</a> bread and
cereals, meat, fish, milk, eggs and cheese, oils and fats, fruit, vegetables, sugar, sweets, and desserts. The last change in and recomposition of this basket was from January 2022.</p>
<h2>Differences</h2>
<p>The spending patterns of South African households differ <a href="http://www.statssa.gov.za/publications/P0141/P0141March2022.pdf">according</a> to the 10 income deciles identified by Stats SA. Households <a href="http://www.statssa.gov.za/publications/P0141/P0141March2022.pdf">in the lowest decile</a> have an annual income below R20 140, while the highest decile covers households with an annual income above R312 247.</p>
<p>Given this large income differential, there are considerable differences the percentage of income that households in the different deciles spend on food.</p>
<p>In the headline CPI, food has a <a href="http://www.statssa.gov.za/publications/P0141/P0141January2022.pdf">spending weight of 15,30 out of 100</a>. However, food price increases in the CPI are normally reported in the media <a href="http://www.statssa.gov.za/publications/P0141/P0141January2022.pdf">together</a> with increases in non-alcoholic beverages (1,84/100 weight), with a combined weight of 17,14 in the headline CPI.</p>
<p>The spending basket of South African households at retail outlets includes a lot of other items too, such as <a href="http://www.statssa.gov.za/publications/P0141/P0141January2022.pdf">personal care products</a> with a weight of 2,1 out of 100 in the headline CPI, cleaning materials and maintenance products (0,35), alcoholic beverages (4,29) and tobacco (1,97).</p>
<p>Not all households consume all the items included in the index. The headline CPI therefore simply reflects “average expenditure”. </p>
<p>On the same basis of “average” expenditure, the weight of household expenditure on food and non-alcoholic beverages <a href="http://www.statssa.gov.za/publications/P0141/P0141January2022.pdf">differs considerably</a> from the 17,14 used in the headline inflation. In the <a href="https://www.statssa.gov.za/publications/P01415/P014152019.pdf">top income decile</a>, the weight for these items is 10,62 out of 100, compared to a weight of 50,31 in the lowest income decile.</p>
<p>This vast difference in expenditure between low- and high-income earners confirms that food price increases affect various income groups differently. </p>
<h2>Why curbing inflation matters</h2>
<p>At the moment, inflation is a problem beyond emerging-market economies such as South Africa. Inflation has also accelerated sharply in recent months in developed countries. For instance, <a href="https://www.usinflationcalculator.com/">the US inflation rate</a> was around an average of 3% per annum for many years but accelerated to <a href="https://tradingeconomics.com/united-states/inflation-cpi">above 8% per annum</a>.</p>
<p>Central banks are concerned about inflation because it distorts the economy and erodes the buying power of money. During periods of high inflation, people on fixed incomes such as pensioners get poorer over time. With high inflation, borrowers enjoy an advantage over savers because the capital value of savings is eroded, <a href="https://www.investopedia.com/ask/answers/111414/does-inflation-favor-lenders-or-borrowers.asp">while the real burden of borrowing declines</a>.</p>
<p>For these reasons central banks – including South Africa’s – are constantly on the alert to accelerating inflation. Inevitably, this implies setting interest rates at an appropriate real level above the rate of inflation. </p>
<p>Lower overall inflation benefits households all over the income spectrum. But containing food price inflation most of all helps poor households.</p><img src="https://counter.theconversation.com/content/184465/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is an NRF-rated researcher and previously received funding from the National Research Foundation.</span></em></p>Periods of high food inflation affect poor households the most. This is because they spend a higher percentage of their income on food.Jannie Rossouw, Visiting Professor at the Business School, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1833432022-05-18T09:34:02Z2022-05-18T09:34:02ZReal wages are shrinking, these figures put it beyond doubt<figure><img src="https://images.theconversation.com/files/463854/original/file-20220518-26-sbqv4y.png?ixlib=rb-1.1.0&rect=940%2C736%2C3041%2C1455&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock/The Conversation</span></span></figcaption></figure><p>Every three months the Bureau of Statistics releases the lesser-known cousin of the consumer price index. It’s called the <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/mar-2022">Wage Price Index</a> (WPI) and it records changes in the overall level of wages, in the same way the price index records changes in the overall level of consumer prices.</p>
<p>Rarely does it generate headlines, but coming three days before an election and showing the worst performance ever compared with the consumer price index, it has provided concrete evidence that the buying power of wages is shrinking.</p>
<p>Contrary to hopes that lower unemployment would spark <a href="https://www.rba.gov.au/media-releases/2022/mr-22-12.html">higher wages growth</a>, the WPI barely budged in the year to March: climbing 2.4%, up from 2.3% in the year to December.</p>
<p>The consumer price index for the year to March grew twice as fast, by 5.1%</p>
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<p>It means <a href="https://www.indeed.com/career-advice/career-development/nominal-wage-vs-real-wage">real wages</a> (the buying power of wages) shrank 2.7% over the year to March in aggregate - one of the fastest and steepest declines ever.</p>
<p>Since March, during the election campaign, <a href="https://theconversation.com/rba-governor-philip-lowe-is-hiking-interest-rates-worst-case-itll-mean-an-extra-600-per-month-on-a-500-000-mortgage-182241">interest rates have been pushed up</a>, further adding to the cost of living.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/are-real-wages-falling-heres-the-evidence-182171">Are real wages falling? Here's the evidence</a>
</strong>
</em>
</p>
<hr>
<p>Coming right at the end of the campaign, the news reinforces a traditional Labor concern (living costs) and diminishes a traditional Coalition selling point (superior economic management).</p>
<p>And it’s a full frontal challenge to conventional economics. </p>
<p>Here are just three of the conventional thoughts it has thrown into doubt.</p>
<h2>Wages are determined by supply and demand</h2>
<p>Conventional economics treats the price of labour like the price of any other commodity (such as fruit at a market), determined by supply (if there’s too much the price will fall) and demand (if a lot of people want it the price will rise).</p>
<p>That is held to mean that, even if there is still some unemployment, wages will grow faster if employers find it hard to find workers (as they are now) and slower if workers find it hard to find jobs (as was the case when unemployment was higher).</p>
<p>There is said to be a special unemployment rate – the Non-Accelerating Inflation Rate of Unemployment, NAIRU – below which wages will start to grow quickly, entrenching accelerating inflation.</p>
<p>The problem is that the NAIRU can’t easily be observed, and moves around. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/despite-record-vacancies-australians-shouldnt-expect-big-pay-rises-soon-180416">Despite record vacancies, Australians shouldn't expect big pay rises soon</a>
</strong>
</em>
</p>
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<p>The Treasury and Reserve Bank once believed NAIRU was close to 7%, then 6%, then <a href="https://treasury.gov.au/publication/p2021-164397">5%</a> or lower. Now they are
<a href="https://d3n8a8pro7vhmx.cloudfront.net/theausinstitute/pages/3111/attachments/original/1573673492/Tolerate_Unemployment_but_Blame_the_Unemployed_Formatted.pdf?1573673492">not sure it exists</a>.</p>
<p>With unemployment well below the rates they once believed would push up the growth rate, there is growing doubt about whether it can.</p>
<p>Part of the reason is that unlike the market for fruit (or pork bellies or flat whites), institutions and bargaining power affect what happens to wages in addition to supply and demand. De-unionisation, insecure work, and deregulation of the wage-setting process have shifted the balance of power away from workers.</p>
<h2>Labour markets are flexible</h2>
<p>Decades of changes to Australia’s wage-setting system were sold as allowing labour markets to respond more smoothly to changes in supply and demand, ensuring workers were more closely paid in accordance with what they produced (productivity).</p>
<p>But a lot of (anti-worker) rigidity remains. One source is punitive public sector pay caps, which even the <a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2Feea5d0b8-72e9-4b5e-acf8-52ed46888ced%2F0001%22;src1=sm1">Reserve Bank</a> says are contributing to weak wage growth.</p>
<p>Another is <a href="https://www.fwc.gov.au/greenfields-agreement">greenfield enterprise agreements</a>, which lock in predetermined pay rates for years.</p>
<h2>Inflation originates in the labour market</h2>
<p>Anthony Albanese sparked an <a href="https://www.smh.com.au/politics/federal/albanese-sparks-political-storm-by-backing-wage-rise-to-match-inflation-20220510-p5ak48.html">important debate</a> when he said wages should at least keep up with inflation. </p>
<p>Scott Morrison said this would be like “<a href="https://www.abc.net.au/news/2022-05-11/morrison-hits-back-on-labor-inflation-pay-rise-push/101055134">throwing throwing fuel on the fire</a>” of inflation. But Wednesday’s figures seem to indicate that inflation has a life of its own. It is soaring while wages growth is not.</p>
<p>And after adjusting for productivity growth (which has been surprisingly resilient, averaging 2% per year for the past two years), unit labour costs have grown the slowest in years, by just 1.5% per year since 2019. </p>
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<p>Whatever is causing inflation, it isn’t firms passing on higher wage costs to their customers. Some are passing on higher profit margins. If anything, what we are experiencing is more like profit-price inflation than wage-price inflation.</p>
<p>During the COVID crisis, profits climbed to a record high as a share of GDP while labour compensation (mainly wages) fell to its <a href="https://assets.nationbuilder.com/theausinstitute/pages/4033/attachments/original/1652197383/Wages_Crisis_Revisited_Formatted.pdf?1652197383">lowest point in postwar history</a>.</p>
<p>While economic truisms are being reassessed, voters are in the process of coming to grips with what stubbornly low wages growth means for them. Many more of them make their living by selling their labour than by taking profits.</p><img src="https://counter.theconversation.com/content/183343/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jim Stanford is a member of the Australian Services Union</span></em></p>The buying power of wages shrank a record 2.7% over the year to March, calling into question assurances about the link between low unemployment and high wage growth.Jim Stanford, Economist and Director, Centre for Future Work, Australia Institute; Honorary Professor of Political Economy, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1818322022-04-27T06:35:41Z2022-04-27T06:35:41ZInflation hits 5.1%. How long until mortgage rates climb?<figure><img src="https://images.theconversation.com/files/459964/original/file-20220427-19-ncf90b.png?ixlib=rb-1.1.0&rect=760%2C431%2C1940%2C1048&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock/ABS</span></span></figcaption></figure><p>Australian consumer prices jumped an extraordinary 2.1% in the first three months of the year, the biggest quarterly jump since the introduction of the 10% goods and services tax at the start of the century.</p>
<p>The outsized increase, together with a larger than normal increase in the months to December, pushed Australia’s annual inflation rate way above the Reserve Bank’s 2-3% target to <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">5.1%</a> – the biggest annual inflation rate for two decades. </p>
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<p>Petrol prices rose to a record high. The Bureau of Statistics says averaged unleaded petrol averaged A$1.83 per litre in the March quarter. </p>
<p>The annual increase, 35.1%, was the biggest since Iraq’s invasion of Kuwait in 1990.</p>
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<p>New dwelling prices rose due to shortages of labour and materials, and fewer government grants. Fresh food prices have increased due to floods. </p>
<p>Home prices, sometimes erroneously thought to be excluded from the consumer price index, surged 13.7% over the year, the most since the start of the GST.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/whats-in-the-cpi-and-what-does-it-actually-measure-165162">What's in the CPI and what does it actually measure?</a>
</strong>
</em>
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<p>The increase tracks the cost of buying a new dwelling by an owner occupier, and reflects what the Bureau describes as high levels of building activity combined with ongoing shortages of materials and labour.</p>
<p>While the cost of housing is included in the consumer price index, the cost of land is not, being treated as an investment rather than a consumer good.</p>
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<p>To get a better idea of what would be happening were it not for these unusual and outsized moves, the Bureau of Statistics calculates what it calls a “<a href="https://www.rba.gov.au/education/resources/explainers/inflation-and-its-measurement.html">trimmed mean</a>” measure of underlying inflation.</p>
<p>The trimmed mean excludes the 15% of prices that climbed the most in the quarter and the 15% of prices that climbed the least or fell.</p>
<p>This underlying measure, closely watched by the Reserve Bank, climbed 3.7% – the first time it has climbed beyond the bank’s 2-3% target range since 2010. </p>
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<p>Many people don’t believe the official inflation figures. They say they are too low (although interestingly this time, the <a href="https://www.forexfactory.com/news/1150662-australia-inflation-expectations-melbourne-institutes-april-survey-52">5.2%</a> estimate in the Melbourne Institute’s April consumer survey matched reality). </p>
<p>In part this is because people tend to notice the prices that have jumped. Petrol prices are particularly visible. People tend not to notice the many other prices, including rents in some parts of Australia, that have been falling.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/as-petrol-prices-rise-will-carbon-emissions-come-down-178024">As petrol prices rise, will carbon emissions come down?</a>
</strong>
</em>
</p>
<hr>
<p>And in part it is because movements in the consumer price index are an average.</p>
<p>The price of the bundle of goods and services used by around half the households would have gone up by more than 5.1%, and the price of the bundle used by the other half by less than 5.1%. The households facing the increases notice it more. </p>
<p>Over the past ten years the price of clothing has fallen 6%, and the price of communications services 23%. The price of health services has climbed 40%</p>
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<p>Looking ahead, inflation is likely to drop in the June quarter. Oil prices are <a href="https://tradingeconomics.com/commodity/crude-oil">falling</a>, and the budget petrol price relief will cut prices a further 22 cents a litre.</p>
<p>Some supply chain problems and skilled labour shortages caused by the pandemic are likely to ease. And the Australian dollar has climbed, which should push down the price of imports.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/despite-record-vacancies-australians-shouldnt-expect-big-pay-rises-soon-180416">Despite record vacancies, Australians shouldn't expect big pay rises soon</a>
</strong>
</em>
</p>
<hr>
<p>Unless there is a significant pickup in wage growth (we find out in three weeks, <a href="https://theconversation.com/there-are-4-economic-wildcards-between-now-and-election-day-the-first-gets-played-this-week-181839">three days before the election</a>) inflation may start to come back down of its own accord, without the need for the Reserve Bank to push up rates.</p>
<p>But there are certainly alternative scenarios.</p>
<h2>Over to the Reserve Bank</h2>
<p>The response of the Reserve Bank to higher prices is not as automatic as often supposed. But with the RBA cash rate at an all-time low, and an increasing risk that the current inflation will become embedded in expectations, an increase in rates is a matter of “when” not “if”.</p>
<p>As Prime Minister John Howard and Treasurer Peter Costello discovered in the election they lost in 2007, the Reserve Bank won’t hold off on increasing interest rates just because an election is imminent. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-rba-has-lost-patience-on-rates-but-it-isnt-rushing-to-push-them-up-180681">The RBA has lost patience on rates, but it isn't rushing to push them up</a>
</strong>
</em>
</p>
<hr>
<p>Asked if the bank would tighten rates if the evidence suggested it needed to near an election, the then governor said: “<a href="https://www.afr.com/policy/economy/rba-governor-glenn-stevens-full-exit-interview-20160907-graws7">of course we would, because we do our job</a>”.</p>
<p>After its April meeting the bank said it would wait for information before moving. </p>
<blockquote>
<p>over coming months, important additional evidence will be available on both inflation and the evolution of labour costs. Consistent with its announced framework, the board agreed that it would be appropriate to assess this evidence</p>
</blockquote>
<p>The labour cost (wage) data are released on May 18, meaning the first increase in interest rates may well not be until after the election, at the board’s June 7 meeting. If the wages data show no acceleration, it might be later.</p>
<h2>How high for mortgage interest rates?</h2>
<p>The Reserve Bank generally tries to move the “<a href="https://www.rba.gov.au/statistics/cash-rate/">cash rate</a>” (the interest rate on overnight loans) in steps of 0.25 percentage points. But, unusually, the current target is 0.10%. So it might first move 15 points to 0.25%. </p>
<p>If it wants to send a stronger signal, it will move 40 points to 0.50%. Banks are generally not shy about passing these changes on.</p>
<p>If the Reserve Bank hikes more than once, mortgage interest rates might climb from their present range of 3-3.5% to 4-5% over the course of the year.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/there-are-4-economic-wildcards-between-now-and-election-day-the-first-is-this-week-181839">There are 4 economic wildcards between now and election day. The first is this week</a>
</strong>
</em>
</p>
<hr>
<p>But the Reserve Bank will not push interest rates as high as it did during <a href="https://www.rba.gov.au/statistics/cash-rate/">previous</a> tightening cycles. Households have <a href="https://www.rba.gov.au/publications/rdp/2020/pdf/rdp2020-05.pdf">more debt</a>, meaning that a rate increase of any given size has more impact than it once would have.</p>
<p>It’s hard to know where a series of rate rises would end, but it’s a fair bet the cash rate will end up higher than the Reserve Bank’s 2-3% inflation target, making the real interest rate positive (above inflation).</p>
<p>Banks are required to assure themselves that borrowers could meet repayments if rates rose by <a href="https://www.rba.gov.au/publications/fsr/2021/oct/mortgage-macroprudential-policies.html">three percentage points</a>, which is just as well. </p>
<h2>Who will be hurt?</h2>
<p>About a third of households have a mortgage, and face higher payments. </p>
<p>But it will take a while for all of them to be affected. Around 40% of borrowers have “<a href="https://www.rba.gov.au/publications/fsr/2022/apr/household-business-finances.html">fixed-rate”</a> loans where the interest rate is only adjusted every three years. </p>
<p>And according to the Reserve Bank, typical borrowers are currently <a href="https://www.rba.gov.au/speeches/2022/sp-gov-2022-03-22-q-and-a-transcript.html">two years </a> ahead on repayments, which suggests most will be able to cope.</p><img src="https://counter.theconversation.com/content/181832/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins is a former economic forecaster in the Reserve Bank and Australian Treasury.</span></em></p>Inflation is well outside the Reserve Bank’s target band and higher than it has been for two decades.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society and NATSEM, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1804162022-04-03T20:00:21Z2022-04-03T20:00:21ZDespite record vacancies, Australians shouldn’t expect big pay rises soon<figure><img src="https://images.theconversation.com/files/455733/original/file-20220401-30473-ue3s19.png?ixlib=rb-1.1.0&rect=159%2C99%2C2502%2C1560&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Ron Lach/Pexels</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Something extraordinary has been happening for Australians seeking jobs in the past few months.</p>
<p>The number of vacant jobs on offer has soared to a new all-time high. </p>
<p>Figures released in budget week show there were almost twice as many jobs available in February this year – 423,500 – as in February 2020, before COVID arrived on our shores. And the number of Australians satisfying the ABS that they were “unemployed” was just 563,300, the lowest in 13 years.</p>
<hr>
<p><strong>More job vacancies for each unemployed person than ever before</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/455459/original/file-20220331-17-sx8jy2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Seasonally adjusted.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/labour/jobs/job-vacancies-australia/feb-2022#media-releases">ABS labour force, job vacancies</a></span>
</figcaption>
</figure>
<hr>
<p>What this means is that in February 2022 there were only 1.3 unemployed people chasing each vacant job, the smallest ratio on record — down from three unemployed people for each vacancy in 2020, five for each vacancy in 2000, and seven in 1990.</p>
<hr>
<p><strong>Number of unemployed people for each vacancy</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=273&fit=crop&dpr=1 600w, https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=273&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=273&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=343&fit=crop&dpr=1 754w, https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=343&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/455912/original/file-20220403-95703-z9o4wp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=343&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">February, seasonally adjusted.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/labour/jobs/job-vacancies-australia">ABS Job vacancies, Labour force</a></span>
</figcaption>
</figure>
<hr>
<p>The unemployment rate is now just 4%, and is budgeted to fall to <a href="https://public.flourish.studio/visualisation/9168575/?utm_source=embed&utm_campaign=visualisation/9168575">3.75%</a> within months, taking it to a five-decade low.</p>
<h2>Our wages aren’t keeping up</h2>
<p>Yet wages growth in Australia remains astoundingly low. Now <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">2.3%</a>, it has been below 2.5% for seven years. </p>
<p>The Reserve Bank says it is targeting wages growth of “<a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-11-16.html">three point something</a>”. It has failed to achieve it for the best part of a decade.</p>
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<p>The low wage growth, compared with unusually high price growth, means wages growth has slipped 1.2% below price growth over the past year. That means what Australians are earning isn’t keeping up with rising prices.</p>
<h2>Budget forecasts that don’t make sense</h2>
<p>The budget anticipates price growth of <a href="https://budget.gov.au/2022-23/content/bp1/download/bp1_bs-1.pdf">4.25%</a> in 2021-22 alongside wages growth of 2.75%, meaning Australians’ buying power will shrink even more, by 1.5%.</p>
<p>In the Budget year, 2022-23, it predicts an uptick in wages growth to 3.25% alongside a dip in price growth to 3%, meaning wages would claw back 0.25% of the buying power they lost.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-theres-no-magic-jobless-rate-to-increase-australians-wages-176538">Why there's no magic jobless rate to increase Australians' wages</a>
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</em>
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<p>And here’s where this year’s budget forecasts don’t make sense.</p>
<p>It forecasts that what we’re seeing right now – price rises outstripping wages growth – is suddenly going to flip: that we’re about to see a slowdown in price inflation, alongside an acceleration in wages growth.</p>
<p>Here’s the odd part of it. On one hand, the Treasury is telling us it expects the unemployment rate to fall further below the “<a href="https://cdn.theconversation.com/static_files/files/2059/NAIRU_Sensitivity_Budget_2022-23.pdf">non-accelerating-inflation rate of unemployment</a>” – which by definition means inflation would accelerate. Yet the budget predicts inflation will fall. </p>
<p>It’s a strange and unexplained departure from conventional forecasting.</p>
<h2>Employers get to pick what they pay</h2>
<p>If price growth merely stays at its current level of 3.5%, the budget’s forecast of 3.25% wages growth means real wages will fall. </p>
<p>And, given most of the budgets since 2014 have <a href="https://www.theguardian.com/business/grogonomics/2021/may/11/australia-federal-budget-2021-six-graphs-you-need-to-see-grogonomics-greg-jericho">overestimated wages growth</a>, it is worth considering what would happen if wages growth has been overestimated once again: real wages would fall still further.</p>
<p>Something weird is happening in the labour market.</p>
<p>With very few unemployed people available for each vacancy, employers ought to be offering higher wages to compete for workers.</p>
<p>But the concept of “<a href="https://obamawhitehouse.archives.gov/sites/default/files/page/files/20161025_monopsony_labor_mrkt_cea.pdf">monopsony</a>” gives us an idea why that’s not happening.</p>
<p>The core idea of monopsony is that employers can <a href="https://www.brookings.edu/research/a-proposal-for-protecting-low-income-workers-from-monopsony-and-collusion/">choose</a> (within constraints) the wages they pay their workers.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/can-do-capitalism-is-delivering-less-than-it-did-here-are-3-reasons-why-172376">'Can-do capitalism' is delivering less than it did. Here are 3 reasons why</a>
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<p>If this sounds obvious, I apologise, but it’s very different to the <a href="https://www.economicsonline.co.uk/business_economics/competitive_labour_markets.html/#:%7E:text=In%20a%20perfectly%20competitive%20labour%20market%2C%20where%20the,firm%20is%20perfectly%20elastic%20at%20the%20market%20rate.">perfect competition</a> model of the labour market once loved by economists, in which wages are set by bargaining in a two-sided market.</p>
<p>When employers offer low wages, they can pay the price with higher staff turnover, unfilled vacancies, absenteeism or poor product quality.</p>
<p>But they still feel they can get away with paying low wages, and leaving many vacancies unfilled. And other employers feel they are forced to keep wages low, due to <a href="https://press.anu.edu.au/publications/realities-and-futures-work">competing against low-price firms</a> and because their immediate customers (such as supermarkets) insist on low prices.</p>
<p>These employers are able to choose to pay lower wages than in the past because workers are less powerful and their collective bargaining power is less effective than it once was. </p>
<h2>Power imbalances keep wages in check</h2>
<p>Work is insecure. Many workers face casual employment, contracting, labour hire, franchising or underemployment. Trade union membership has plummeted.</p>
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<p><iframe id="Ccsht" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Ccsht/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<p>Only 12.7% of male workers are in a trade union in their main job, down from more than 50% at the start of the 1980s. Just 15.9% of women are, down from 43%.</p>
<p>Industrial disputes are at record lows partly because industrial laws have changed, making it extremely difficult for unions to strike for higher wages, and easy for employers to get around them.</p>
<p>Don’t expect any surges in real wages, no matter how tight the labour market is, while this new structure remains.</p><img src="https://counter.theconversation.com/content/180416/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Peetz receives funding from the Australian Research Council and, as an academic, has undertaken research over many years with occasional financial support from governments in Australia and overseas from both sides of politics, employers and unions.</span></em></p>For the first time, there’s almost one job vacancy for every unemployed Australian. But that isn’t translating to better wages.David Peetz, Professor Emeritus, Griffith Business School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1786842022-03-16T14:01:12Z2022-03-16T14:01:12ZWhy the cost of food is not yielding to Nigeria’s government policies<figure><img src="https://images.theconversation.com/files/451571/original/file-20220311-18-oa09dj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Threatened by insecurity, Nigerian farmers are increasingly abandoning their land, adding to food inflation</span> <span class="attribution"><span class="source">Photo by Kola Sulaimon/AFP via Getty Images</span></span></figcaption></figure><p>Nigeria has had a series of policies directed towards improving food supply at affordable prices. <a href="https://www.irglobal.com/article/impact-of-selected-agricultural-policies-and-intervention-programs-in-nigeria-1960-till-date/">Policies</a> have kept coming since the 1960s, including the <a href="https://www.sciencedirect.com/science/article/abs/pii/0309586X85900779">National Accelerated Food Production Programme of 1972</a> and the most recent – <a href="https://sciencenigeria.com/natip-policy-implementation-will-fast-track-agricultural-revolution-shehuri/">the National Agricultural Technology and Innovation Policy of 2021 to 2025</a>. </p>
<p>Essentially, these policies aimed at improving food production, through land reform, mass literacy, affordable funding, subsidised farm inputs, research, mechanisation, linkages and extension services. </p>
<p>Yet food prices have continued to rise. </p>
<p>I have previously <a href="https://theconversation.com/food-prices-in-nigeria-have-shot-through-the-roof-but-is-the-pandemic-to-blame-144028">written</a> about food price inflation in recent times, arguing that the COVID pandemic was not solely responsible. Other drivers included the dearth of capital, technology, infrastructural facilities and insurgency.</p>
<p>These factors still feature prominently as drivers of food inflation in Nigeria. They show that policies aimed at tackling food inflation have failed.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/pandemic-underscores-flaws-in-nigerias-farming-and-food-supply-chains-156998">Pandemic underscores flaws in Nigeria's farming and food supply chains</a>
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<p>Well out of the COVID lockdown, <a href="https://www.statista.com/statistics/1118891/monthly-consumer-price-index-in-nigeria/">Nigeria’s consumer price index</a> has persistently increased. Between September 2020 and January 2021, there was an 8.13% increase, and a further rise of 8.07% by July 2021. By January 2022, the composite food index <a href="https://nairametrics.com/2022/02/25/fuel-scarcity-drives-food-prices-up-in-lagos-as-traders-lament-surge-in-transport-cost/">rose</a> by <a href="https://tradingeconomics.com/nigeria/food-inflation">17.13% year on year</a>, in spite of government efforts to stabilise food prices. </p>
<p>An example is the <a href="https://allafrica.com/stories/202201180515.html">rice pyramid initiative</a> by the federal government. In a bid to improve the local supply of rice and suppress prices, the government, through the Central Bank’s <a href="https://www.cbn.gov.ng/Out/2021/CCD/ABP%20Guidelines%20October%2013%202021%20-%20Final%20(002).pdf">Anchor Borrower’s fund</a>, supported local rice farmers to double their production capacity between 2015 and 2021. The output of that programme was stacked in pyramids displayed to the public in January 2022. Two months after this display of rice, the price of the staple food rose by 15%. </p>
<p>This is further evidence of some disconnection between policy and results. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-nigeria-should-first-support-rice-farmers-before-it-cuts-off-imports-108095">Why Nigeria should first support rice farmers before it cuts off imports</a>
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<p>The reason policies haven’t worked is that they lack substance and are not implemented appropriately. The danger is that food inflation will continue if these problems are not attended to. </p>
<p>The government needs to be more inclusive in formulating policies. From the start, it should involve those who will implement these policies. </p>
<h2>2022 food prices</h2>
<p>The price of a 50kg bag of rice rose by 17.58% from March 2021 to March 2022. A 100kg bag of beans became 5% more expensive in the same period. Tomatoes went up by <a href="https://www.statista.com/statistics/1121161/prices-of-selected-food-products-in-nigeria/">11.93%</a> for a 60kg basket and onions by 5.27%.</p>
<p>Most Nigerians can’t afford meat, a source of protein. The price of boneless beef rose 24.4%, frozen chicken prices 14.3%, and titus fish (mackerel) a whopping 34.5%. </p>
<p>Perhaps the most jarring are the <a href="https://nairametrics.com/2022/02/25/fuel-scarcity-drives-food-prices-up-in-lagos-as-traders-lament-surge-in-transport-cost/">45.5%</a> increase in the price of eggs and the 44.4% increase in the price of bread. The price of milk has increased by 50% and noodles by 24%. </p>
<p>Fruits are no longer within the reach of lower earners, as essential as they are for a balanced diet. Price increases have ranged from <a href="https://www.legit.ng/1401550-legitng-weekly-price-check-traders-reveal-top-seasonal-fruits-lagos-market.html">50% to 100%</a>.</p>
<p>The cost of <a href="https://punchng.com/transport-fares-jump-by-283-amid-rising-fuel-subsidy-nbs-report/">transport</a>, which is a key service required for food supply, increased by 283% between January 2017 and December 2021. This was without an official fuel pump price increase. </p>
<h2>What’s going wrong</h2>
<p>Obviously, the rate at which food prices have risen shows that they do not reflect the expected outcomes of government policies aimed at tackling the cost of food. </p>
<p>My <a href="https://theconversation.com/food-prices-in-nigeria-have-shot-through-the-roof-but-is-the-pandemic-to-blame-144028">previous research</a> highlighted some of the reasons, including inadequate financing, technological know-how and banditry.</p>
<p>A further factor is errors of policy. As I have found in my <a href="https://www.jstor.org/stable/10.5325/jafrideve.21.1.0096">research</a> that focused on the agribusiness value chain in sub-Saharan Africa, increased technology and land usage have not improved output. This indicated the possibility that digital technology introduced into the agriculture value chain was not being accessed by those who really needed them or would have used the technology. </p>
<p>Firstly, policy makers often lack the deep and intensive preliminary groundwork they need. Policies therefore lack substance. Policy formulation requires deeper work, broader scope, workability testing and the inclusion of those who will eventually implement the policy. These elements are often missing in the various policies Nigeria has designed to tackle rising food prices. </p>
<p>Secondly, policies are usually implemented in a way that is detached from the formulation process. This often flows from the fact that those who must implement the policy are not carried along in its formulation. Since they were not part of the formulation, what they require in implementation is often not taken into consideration. The policies become unworkable and unimplementable. </p>
<p>Another factor in food price inflation is Nigeria’s rate of population growth. Policies often fail to take adequate account of this. In 2022, the population <a href="https://www.macrotrends.net/countries/NGA/nigeria/population-growth-rate">growth rate</a> is expected to be 2.53%. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/nigerias-2022-census-is-overdue-but-preparation-is-in-doubt-177781">Nigeria's 2022 census is overdue but preparation is in doubt</a>
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</em>
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<p>This explains the need to import enormous quantities to meet demand. For example, <a href="https://www.trade.gov/country-commercial-guides/nigeria-agriculture-sector">52%</a> of the rice demand was met from imports in 2018. For wheat, 99.7% of total demand is sourced from imports. About 70% of dairy products demand is imported. </p>
<p>This is why price volatility in the global commodity market directly affects domestic food prices in Nigeria. For instance, Russia’s war on Ukraine could destabilise international trade and the commodity market and this would have direct implications for food prices in Nigeria.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-russia-ukraine-conflict-could-influence-africas-food-supplies-177843">How Russia-Ukraine conflict could influence Africa's food supplies</a>
</strong>
</em>
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<hr>
<p>Though policies have acknowledged the need to produce more, the supply of food has not improved. One reason is these deficiencies in formulation and implementation of policy. </p>
<h2>How to get ahead</h2>
<p>The government needs to be more inclusive by incorporating its officials at state and local government levels as well as smallholder farmers and other key players in the agricultural value chain in the formulation of policies that they would later be expected to implement. </p>
<p>This improves understanding, enhances commitment and optimises the policy progress monitoring. </p>
<p>The country needs to import less food and produce more, sustainably. </p>
<p>Nigeria can achieve sufficient food supply at reasonable prices. It only requires policies that focus on relevant issues, and their sound execution.</p><img src="https://counter.theconversation.com/content/178684/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Folasade Bosede Adegboye does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In spite of policies aimed at tackling food inflation, food prices in Nigeria have continued to rise.Folasade Bosede Adegboye, Senior Lecturer in Finance, Covenant UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1759152022-02-01T05:03:24Z2022-02-01T05:03:24ZInflation is raising prices and reducing real wages – what should be done to support NZ’s low-income households?<figure><img src="https://images.theconversation.com/files/443630/original/file-20220201-21-1hrpm25.jpg?ixlib=rb-1.1.0&rect=7%2C7%2C5196%2C3409&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>There is no doubt life is becoming much more expensive in New Zealand as inflation hits <a href="https://www.stats.govt.nz/news/annual-inflation-hits-a-three-decade-high-at-5-9-percent">a three-decade high</a>, influenced by both domestic and international factors such as increased food, energy and housing costs, pent-up demand for consumer goods, and ongoing supply-chain disruptions.</p>
<p>In the 12 months to December 2021, <a href="https://www.stats.govt.nz/topics/consumers-price-index">Consumer Price Index</a> (CPI) inflation
surged to <a href="https://www.stats.govt.nz/news/annual-inflation-hits-a-three-decade-high-at-5-9-percent">5.9%</a>, compared with <a href="https://www.stats.govt.nz/news/inflation-highest-in-over-a-decade">4.9%</a> in September, <a href="https://www.stats.govt.nz/information-releases/consumers-price-index-june-2021-quarter">3.3%</a> in June, and just <a href="https://www.stats.govt.nz/information-releases/consumers-price-index-march-2021-quarter">1.5%</a> in March.</p>
<p>Price increases have been led by the essential goods and services — food, housing and transport. Annual food prices were <a href="https://www.stats.govt.nz/news/annual-food-price-increase-the-highest-in-a-decade">4.5% higher</a> in December 2021 than they were a year previously, rents <a href="https://www.stats.govt.nz/news/annual-inflation-hits-a-three-decade-high-at-5-9-percent">increased 3.8%</a> and petrol prices <a href="https://www.stats.govt.nz/news/annual-inflation-hits-a-three-decade-high-at-5-9-percent">leapt 30%</a>.</p>
<p>But as Prime Minister Jacinda Ardern has rightly <a href="https://www.rnz.co.nz/news/business/460314/inflation-rises-to-highest-annual-rate-since-mid-1990">said</a>, “we are not alone in experiencing high rates of inflation”.</p>
<p>Australia’s CPI <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">rose 3.5%</a> over the 12 months to the December 2021 quarter, and the UK’s CPI <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/december2021">rose by 5.4%</a>. Inflation has reached <a href="https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area">5% in the Eurozone</a> and <a href="https://www.bls.gov/news.release/cpi.nr0.htm">7% in the US</a>.</p>
<p>The question will be: how do we support those lower-income households most disadvantaged by these trends? </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1487950774848016384"}"></div></p>
<h2>Same problem, many causes</h2>
<p>This global inflation has many causes, including the effects of <a href="https://blogs.imf.org/2021/07/20/seizing-the-opportunity-for-a-pro-growth-post-pandemic-world/">trillions of dollars</a> of <a href="https://johnhcochrane.blogspot.com/2021/12/the-ghost-of-christmas-inflation.html">fiscal and monetary stimulus</a>, pent-up demand, increases in shipping costs, ongoing supply-chain disruptions, and rising energy prices.</p>
<p>According to the Freightos Baltic Index, which reports daily prices of containers shipped by ocean and air, <a href="https://research.stlouisfed.org/publications/economic-synopses/2021/07/07/rethinking-global-value-chains-during-covid-19-part-2">shipping costs in May 2021</a> were more than 200% higher than in May 2020.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/inflation-inequality-poorest-americans-are-hit-hardest-by-soaring-prices-on-necessities-174853">Inflation inequality: Poorest Americans are hit hardest by soaring prices on necessities</a>
</strong>
</em>
</p>
<hr>
<p>A 20-foot container <a href="https://www.treasury.govt.nz/publications/research-and-commentary/rangitaki-blog/weu-special-topic-economic-impacts-global-supply-chain-disruption">from Shanghai to New Zealand</a>, which cost around US$500 prior to the pandemic, was costing businesses around US$5,000 in September 2021.</p>
<p>Energy prices in the OECD soared by <a href="https://www.oecd.org/newsroom/consumer-prices-oecd-updated-11-january-2022.htm">27.7%</a> in the year to November, the highest rate since June 1980.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/443628/original/file-20220201-21-s0i9lg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/443628/original/file-20220201-21-s0i9lg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/443628/original/file-20220201-21-s0i9lg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/443628/original/file-20220201-21-s0i9lg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/443628/original/file-20220201-21-s0i9lg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/443628/original/file-20220201-21-s0i9lg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/443628/original/file-20220201-21-s0i9lg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The cost of moving a container from Shanghai to NZ rose from US$500 before the pandemic to about US$5,000 in September 2021.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Interest rates will keep rising</h2>
<p>Generally, when inflation rises, <a href="https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/20/Monetary-Policy-and-Central-Banking">central banks</a> intervene and raise interest rates to slow the economy and reduce inflation. The Reserve Bank of New Zealand (RBNZ) implements <a href="https://www.rbnz.govt.nz/monetary-policy">monetary policy</a> by setting the official cash rate (OCR), which is reviewed seven times a year.</p>
<p>In October last year it <a href="https://www.rbnz.govt.nz/news/2021/10/monetary-stimulus-further-reduced-official-cash-rate-raised-to-050-percent">raised the OCR</a> by 25 basis points (a quarter of a percentage point) to 0.50% – significantly, the first OCR rise in seven years, followed soon after in November with <a href="https://www.rbnz.govt.nz/news/2021/11/mpc-continues-to-reduce-monetary-stimulus">another hike</a> to 0.75%.</p>
<p>This <a href="https://www.odt.co.nz/business/interest-rate-rise-wednesday-anticipated">was expected</a>, and I anticipate a follow-up hike of the same magnitude in February.</p>
<p>In fact, the most likely scenario is that the RBNZ will continue to raise the OCR in measured steps of 25 basis points, with the cash rate reaching 2% following its August 2022 policy decision.</p>
<p>That said, if economic risks increase at the domestic and global levels, we can expect to see increases of 50 basis points from some of the policy decision meetings.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/omicron-will-only-add-to-looming-workforce-shortages-already-faced-by-key-new-zealand-industries-175612">Omicron will only add to looming workforce shortages already faced by key New Zealand industries</a>
</strong>
</em>
</p>
<hr>
<h2>Inflation affects rich and poor differently</h2>
<p><a href="https://theconversation.com/inflation-inequality-poorest-americans-are-hit-hardest-by-soaring-prices-on-necessities-174853">Recent research</a> suggests American households in different income groups did not experience the 7% inflation rate the same way: it felt like 7.2% for the lowest-income households and 6.6% for the highest-income families. The main cause of this gap is the increase in grocery and gas prices.</p>
<p>I think we have a similar situation in New Zealand, where price increases for food, transport and housing are <a href="https://www.newsroom.co.nz/ideasroom/inflations-challenge-for-central-banks">particularly harmful</a> for low-income households.</p>
<p>On top of that, real wages are shrinking for those same households.</p>
<p>Wages are measured in dollars – known as the nominal wage – but what matters when you go to a supermarket is your <em>real wage</em>, measured in terms of the goods you can afford to buy.</p>
<p>The real wage is calculated by dividing the nominal wage by a price index such as the CPI. A concern with inflation is that real wages can fall even if nominal wages don’t. And this is happening in New Zealand.</p>
<p>While wages have increased, they <a href="https://www.stuff.co.nz/opinion/127630011/why-so-many-cant-bear-the-cost-of-living-as-inflation-rises-to-59pc">haven’t come close</a> to keeping pace with inflation.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1486490022832324611"}"></div></p>
<h2>Raise the minimum wage?</h2>
<p>How should the government address the impact on low-income households? Already there have been calls for an <a href="https://www.newshub.co.nz/home/money/2022/01/calls-for-urgent-minimum-wage-increase-as-inflation-hits-30-year-high-of-5-9-pct.html">increase to the minimum wage</a>. But would this work?</p>
<p>An earlier <a href="https://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.2007.00532.x">survey</a> of the effects of the minimum wage on prices reviewed several US studies and summarised that a 10% minimum wage increase raises food prices by no more than 4%.</p>
<p>This sounds promising: minimum wage increases may not cause real wages to decline. However, it’s only one side of the story.</p>
<p>As has been <a href="https://www.stuff.co.nz/opinion/124895800/minimum-wage-increase-boon-or-bane">discussed elsewhere</a>, the short-run gains of higher minimum wages can be completely offset by the harmful long-term effects: increasing costs for firms, higher unemployment in the post-COVID era.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/inflation-why-it-could-surge-after-the-pandemic-159608">Inflation: why it could surge after the pandemic</a>
</strong>
</em>
</p>
<hr>
<h2>Targeted relief for low-income households</h2>
<p>An alternative is directly targeting relief funds for short-term support. An example of this has been the University of Otago’s <a href="http://otago.custhelp.com/app/answers/detail/a_id/3172/%7E/p%C5%ABtea-tautoko-student-relief-fund">Pūtea Tautoko Student Relief Fund</a>, helping with rent and food for students experiencing financial hardship due to the pandemic. I expect many students will apply again in 2022.</p>
<p>Such schemes could be applied more widely, with local government agencies working with local businesses to identify households that need urgent relief. I would support this as a short-run relief option.</p>
<p>But while it’s true inflation and declining household purchasing power will be pressing concerns in 2022 (and possibly into 2023), we should not forget the future well-being of New Zealanders will be determined by sustainable long-run economic growth.</p>
<p>Many of the same headwinds we faced before COVID-19, such as <a href="https://www.newsroom.co.nz/ideasroom/we-need-to-learn-from-korea-fast">low productivity growth</a>, <a href="https://www.masseypress.ac.nz/books/the-new-new-zealand/">demographic challenges</a> (including population ageing) and the <a href="https://theconversation.com/courageous-investment-means-innovation-stays-in-nz-not-sold-off-overseas-150381">lack of investment options</a>, will still be with us in the years ahead – even if the Reserve Bank can control the pace of price increases in the short term.</p><img src="https://counter.theconversation.com/content/175915/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Murat Ungor does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As inflation bites, targeted relief for those most affected by the rising cost of living would be the best short-term option.Murat Ungor, Senior Lecturer, Department of Economics, University of OtagoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1740932021-12-20T20:58:03Z2021-12-20T20:58:03ZManchin killed Build Back Better over inflation concerns – an economist explains why the $2 trillion bill would be unlikely to drive up prices<figure><img src="https://images.theconversation.com/files/438511/original/file-20211220-27-81z4vs.jpg?ixlib=rb-1.1.0&rect=67%2C112%2C4805%2C3203&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Manchin withdrew his support for Build Back Better. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/CongressManchin/73ec47d195c14cd896df3d04bd277c14/photo?Query=manchin&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1801&currentItemNo=11">AP Photo/J. Scott Applewhite</a></span></figcaption></figure><p><a href="https://www.wsj.com/articles/manchin-rejected-biden-bill-over-inflation-debt-concerns-how-founded-are-those-worries-11639958265">One of Sen. Joe Manchin’s main concerns</a> in deciding to pull his support for President Joe Biden’s Build Back Better plan is that it would drive up inflation, which <a href="https://theconversation.com/why-is-inflation-so-high-is-it-bad-an-economist-answers-3-questions-about-soaring-consumer-prices-173572">is currently rising at the fastest pace in four decades</a>. </p>
<p>On Dec. 19, 2021, the West Virginia Democrat <a href="https://video.foxnews.com/v/6287645097001#sp=show-clips">said in an interview</a> that he couldn’t support the bill in its current form because of the impact he says it would have on increasing consumer prices and the national debt. The decision effectively killed one of Biden’s top economic priorities. </p>
<p>The Senate had been considering the <a href="https://apnews.com/article/climate-immigration-joe-biden-health-lifestyle-bff841da156cb12cd47a564f9e0267eb">roughly US$2 trillion bill</a> <a href="https://www.congress.gov/bill/117th-congress/house-bill/5376">passed by the House</a> that would spend money on health care, education, fighting climate change and much else over the next decade. Senate Majority Leader Chuck Schumer says he <a href="https://www.washingtonpost.com/politics/schumer-vote-despite-manchin/2021/12/20/dcdd202c-6186-11ec-bf70-58003351c627_story.html">still plans to bring it to the floor for a vote</a>.</p>
<p>Manchin and Republicans <a href="https://www.bloomberg.com/news/articles/2021-11-17/top-economists-see-biden-s-spending-plan-adding-to-inflation">have argued</a> the risk that <a href="https://www.marketwatch.com/story/manchin-says-inflation-unknown-is-bigger-problem-than-the-need-for-bidens-build-back-better-plan-11638918421">more spending could push inflation even higher is too great</a>. </p>
<p>As <a href="https://scholar.google.com/citations?user=rlbLcnEAAAAJ&hl=en&oi=ao">an economist</a>, I believe Manchin’s concerns are misguided. Here’s why. </p>
<h2>Putting $2 trillion in context</h2>
<p>High inflation <a href="https://econofact.org/rising-inflation">is clearly a problem at the moment</a> – as the Federal Reserve’s Dec. 15, 2021, <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20211215a.htm">decision to accelerate its withdrawal</a> of economic stimulus signals. </p>
<p>The most recent statistics show inflation, as measured by the annual increase in the Consumer Price Index, <a href="https://www.bls.gov/news.release/cpi.nr0.htm">was 6.8% in November 2021</a>. This is the highest level since 1982 – yet still a long way from the double-digit inflation experienced back then. </p>
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<p>The question, then, is: Could an additional large spending increase cause inflation to accelerate further? </p>
<p>To answer this, it’s useful to put the numbers in some context. </p>
<p>The price tag of the Build Back Better plan passed by the House of Representatives <a href="https://apnews.com/article/climate-joe-biden-business-health-congress-44c43fab00aa95a268a2cba420713d22">is about $2 trillion</a>, to be spent over a 10-year period. If the spending is spread out evenly, that would amount to about $200 billion a year. That’s only about 3% of <a href="https://datalab.usaspending.gov/americas-finance-guide/spending/">how much the government planned to spend in 2021</a>. </p>
<p>Another comparison is to <a href="https://www.investopedia.com/terms/g/gdp.asp">gross domestic product</a>, which is the value of all goods and services produced in a country. U.S. GDP is <a href="https://www.bloomberg.com/news/articles/2021-12-04/goldman-cuts-u-s-gdp-forecast-saying-omicron-is-drag-on-growth">projected to be</a> $22.3 trillion in 2022. This means that the first year of the bill’s spending would be about 0.8% of the GDP.</p>
<p>While that doesn’t sound like much either, it’s not insignificant. Goldman Sachs <a href="https://www.bloomberg.com/news/articles/2021-12-04/goldman-cuts-u-s-gdp-forecast-saying-omicron-is-drag-on-growth">had estimated U.S. economic growth at 3.8%</a> in 2022. If the increased spending translated into economic activity on a dollar-for-dollar basis, that could lift growth by over one-fifth.</p>
<p>But what really matters here is how much the bill would spend in excess of any taxes raised to pay for the program. The <a href="https://taxfoundation.org/build-back-better-plan-reconciliation-bill-tax/">higher taxes on the wealthy and corporations that the House version of the bill calls for</a> would reduce economic activity – by taking money out of the economy – offsetting some of the impact of the spending that would stimulate it. </p>
<p>The <a href="https://www.cbo.gov/publication/57619">Congressional Budget Office estimates</a> that the bill would increase the deficit by $150.7 billion over a decade, or about $15 billion a year. Again assuming this is spread evenly over the 10 years, it would amount to less than one-tenth of 1% of GDP. Even if elements of the bill are front-loaded, it does not seem that this increase in the government debt would contribute much to inflation.</p>
<p>In other words, the proposed spending would make a barely noticeable macroeconomic effect even if it had an <a href="https://www.stlouisfed.org/on-the-economy/2017/december/government-spending-stimulate-economy">unusually disproportionate impact on the economy</a>. </p>
<h2>But it won’t reduce inflation either</h2>
<p>Some proponents of the bill – <a href="https://www.whitehouse.gov/briefing-room/press-briefings/2021/11/15/press-briefing-by-press-secretary-jen-psaki-november-15-2021/">including the White House</a> and <a href="https://www.newsweek.com/56-economists-tout-benefits-bidens-build-back-better-act-despite-gop-inflation-concerns-1658224">some economists</a> – have gone further. They have argued that the proposed spending package would actually reduce inflation by increasing the productive capacity of the economy – or its maximum potential output.</p>
<p>This seems implausible to me, at least given the current level of inflation. Historical evidence shows <a href="https://www.stlouisfed.org/publications/regional-economist/january-1998/a-brave-new-economic-world-the-productivity-puzzle#5##5">a more productive economy can grow more quickly</a> with relatively little upward pressure on prices. <a href="https://www.federalreserve.gov/boarddocs/speeches/1997/199710142.htm">That’s what happened in the U.S. in the 1990s</a>, when the economy grew strongly with little inflation. But it takes time for investments like those in the bill to translate into gains in productivity and economic growth – meaning many of these impacts will be slow to materialize. </p>
<p>And current inflation is likely an acute problem <a href="https://theconversation.com/why-are-prices-so-high-blame-the-supply-chain-and-thats-the-reason-inflation-is-here-to-stay-169441">reflecting supply chain disruptions</a> and pent-up demand, challenges that won’t be resolved by expanding the economy’s productive capacity five or more years down the road. </p>
<p>[<em>Over 140,000 readers rely on The Conversation’s newsletters to understand the world.</em> <a href="https://memberservices.theconversation.com/newsletters/?source=inline-140ksignup">Sign up today</a>.]</p>
<p>At the same time, what’s in the bill <a href="https://www.vox.com/22744837/house-senate-democrats-build-back-better-child-care">would make a big difference</a> to improving the lives of average Americans by <a href="https://www.americanprogress.org/article/the-build-back-better-act-substantially-expands-child-care-assistance/">providing more of them with affordable child</a> and health care and reducing child poverty – areas where the U.S. <a href="https://econofact.org/child-poverty-in-the-u-s">seriously lags</a> <a href="https://www.pgpf.org/blog/2020/07/how-does-the-us-healthcare-system-compare-to-other-countries">behind other rich countries</a>. And it <a href="https://www.nbcnews.com/science/environment/climate-change-efforts-set-big-boost-build-back-better-bill-passes-rcna6471">would help the U.S. fight</a> the ever-worsening effects of climate change. </p>
<p>While the <a href="https://www.nytimes.com/article/build-back-better-explained.html">$2 trillion in spending</a> would be unlikely to worsen inflation if it were to become law, I believe it could do a lot to materially address these challenges America faces. </p>
<p><em>This is an updated version of an <a href="https://theconversation.com/why-spending-2-trillion-on-child-care-health-care-and-fighting-climate-change-wont-make-inflation-any-worse-than-it-already-is-173372">article published</a> on Dec. 16, 2021.</em></p><img src="https://counter.theconversation.com/content/174093/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Klein does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Sen. Manchin effectively killed one of Biden’s key economic priorities by withdrawing his support from the $2 trillion bill.Michael Klein, Professor of International Economic Affairs at The Fletcher School, Tufts UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1718402021-11-18T19:06:19Z2021-11-18T19:06:19ZVital Signs: Chill, this week’s news on wages points to anything but hyperinflation<p>Suddenly people are talking about inflation, even hyperinflation, in a way they haven’t since the 1980s. </p>
<p>In October the United States posted its highest annual consumer price index increase in 30 years, <a href="https://www.bls.gov/cpi/">with inflation up 6.2%</a> and “core” (excluding volatile prices) inflation of 4.6%.</p>
<hr>
<p><strong>US underlying inflation</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=247&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=247&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=247&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=310&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=310&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=310&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">US consumer price index for all urban consumers, all items less food and energy, city average.</span>
<span class="attribution"><a class="source" href="https://fred.stlouisfed.org/graph/?g=rocU">US Bureau of Labor Statistics, St Louis Fed</a></span>
</figcaption>
</figure>
<hr>
<p>Former US Treasury Secretary Larry Summers – arguably the finest policy economist of his generation – contends that what’s happening is not transitory.</p>
<p>He says soon inflation could soon climb to double digits, where it hasn’t been for 40 years.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1460235085937053700"}"></div></p>
<p>There are plenty of other leading economists, including Nobel Prize winner <a href="https://www.nytimes.com/2021/11/11/opinion/inflation-history.html">Paul Krugman</a>, who argue that what’s happening is just temporary, part of the adjustment to post-pandemic life, akin to the tyres of a car <a href="https://www.nytimes.com/2021/05/27/opinion/us-economy-growth.html">spinning uselessly</a> before they gain traction.</p>
<p>Closer to home, the data are less alarming.</p>
<p>Only <a href="https://theconversation.com/top-economists-see-no-prolonged-high-inflation-no-rate-hike-next-year-171731">12</a> of the 55 top economists surveyed by the Economic Society of Australia and The Conversation saw a serious risk of prolonged above-target inflation.</p>
<hr>
<p><strong>US and Australian underlying inflation</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=240&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=240&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=240&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=301&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=301&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=301&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">Australian Bureau of Statistics, US Bureau of Labor Statistics</a></span>
</figcaption>
</figure>
<hr>
<p>On Tuesday, in an address entitled <a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-11-16.html">Recent Trends in Inflation</a>, Reserve Bank Governor Philip Lowe said in most economies inflation was expected to be lower next year rather than higher, with inflation rates generally clustered around 2%.</p>
<p>That’s RBA-talk for “chill, folks”.</p>
<h2>Many wages are barely moving</h2>
<p>The Bureau of Statistics reported on Wednesday that the wage-price index climbed <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">2.2%</a> over the year to September, up from 1.8% over the year to June.</p>
<p>It’s an improvement, but some wages are barely moving. Public sector wages were up just 1.7% and the bureau reported the private sector increase was partly inflated by <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release#spotlight-frequency-of-wage-increases-c-">changes in timing</a>, with fewer September quarter increases than normal last year during lockdowns and a more typical proportion this year.</p>
<p>Four out of ten Australian workers haven’t had an increase for more than a year, compared to 21% at the same time in 2019, before COVID.</p>
<h2>Price growth is weaker than it seems</h2>
<p>Consumer price inflation appears to be well above wages growth at 3%, but much of this is due to the unwinding of the free childcare available a year ago. Averaged over the past two years, annual headline inflation is just <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release#data-download">1.5%</a>.</p>
<p>The official underlying rate of inflation is <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/sep-2021">2.1%</a></p>
<p>This doesn’t sound like the <a href="http://scihi.org/hyperinflation-weimar-republic/">Weimar Republic</a> to me.</p>
<p>Is it difficult to renovate a home in Sydney right now? Sure. Is it expensive to buy a car in the US at the moment? Yes it is. But ask yourself why. </p>
<p>Since living through this pandemic, many of us realised we might need and want to spend more time at home and decided to invest in homes better suited to that. And in the US, which is less vaccinated than Australia, many commuters now prefer to drive to work rather than take their life in their hands by catching public transport.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/top-economists-see-no-prolonged-high-inflation-no-rate-hike-in-2022-171731">Top economists see no prolonged high inflation, no rate hike in 2022</a>
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<p>Any debate that sees former US Treasury Secretary Larry Summers on one side and current Treasury Secretary Janet Yellen as well as Paul Krugman on the other has got to be legitimate.</p>
<p>But it’s been joined by “<a href="https://noahpinion.substack.com/p/inflation-is-up-but-the-inflation">inflation "truthers</a>”, conspiracy theorists who claim the US government – in cahoots with corporate interests – have been cooking the books on inflation, something that hasn’t been happening.</p>
<p>While there is always room for debate about the “<a href="https://theconversation.com/whats-in-the-cpi-and-what-does-it-actually-measure-165162">basket</a>” of goods and services used to calculate the consumer price index, in the US the method hasn’t changed for years.</p>
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<p>The Massachusetts Institute of Technology <a href="http://www.thebillionpricesproject.com">Billion Prices Project</a> has trawled through massive quantities of daily data and arrived at much the same conclusions about inflation as the official data.</p>
<p>Australia’s underlying inflation rate has been below the centre of the Reserve Bank’s target band for a record seven years. Too little inflation runs the risk of causing people to delay buying things, sending the economy backwards, which means it has been important to get inflation back up.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/whats-in-the-cpi-and-what-does-it-actually-measure-165162">What's in the CPI and what does it actually measure?</a>
</strong>
</em>
</p>
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<p>Doing it, as we are beginning to, ought to be seen as a policy success.</p>
<p>Yes, we have to be careful not to push inflation too high. But we should also be careful to avoid not finishing the job of getting inflation (and wages growth) back to where they should be. We’ve got some way to go.</p>
<p><iframe id="5ETFV" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/5ETFV/12/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/171840/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is President-elect of the Academy of the Social Sciences in Australia.</span></em></p>True wages growth, and true price growth, is probably less than the official figures suggest – meaning there’s no need for alarm about inflation in Australia.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1651622021-07-27T04:32:42Z2021-07-27T04:32:42ZWhat’s in the CPI and what does it actually measure?<figure><img src="https://images.theconversation.com/files/413251/original/file-20210727-26-wf8dtj.jpg?ixlib=rb-1.1.0&rect=233%2C239%2C3311%2C2017&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Nils Versemann/Shutterstock</span></span></figcaption></figure><p>So you don’t believe the official inflation figures. Why would you? They show prices climbing at an annual rate of <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">1.1%</a></p>
<p>On Wednesday the update for June quarter is likely to show prices climbing at an annual rate three times as high — somewhere between 3% and 4%, which will probably be another reason you won’t believe them.</p>
<p>(As it happens, most of the “jump” will be because of a different starting point. The 1.1% figure reports what happened after the three months to March 2020. The update will report what’s happened since the three months to June 2020, when coronavirus restrictions triggered a plunge in petrol prices and a temporary childcare subsidy cut the price of most care to <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2020/April/Coronavirus_response-Free_child_care">zero</a>.) </p>
<p>Most of us don’t believe 1.1% or anything like it because it doesn’t accord with our experience. We see petrol prices climbing. We are presented with bills for electricity, gas and rates we find hard to pay.</p>
<p>But here’s the thing. As hard to believe as we find it, electricity, gas and petrol don’t cost us that much over the course of a year.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/413241/original/file-20210727-23-wdsk04.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/413241/original/file-20210727-23-wdsk04.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/413241/original/file-20210727-23-wdsk04.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=969&fit=crop&dpr=1 600w, https://images.theconversation.com/files/413241/original/file-20210727-23-wdsk04.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=969&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/413241/original/file-20210727-23-wdsk04.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=969&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/413241/original/file-20210727-23-wdsk04.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/413241/original/file-20210727-23-wdsk04.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/413241/original/file-20210727-23-wdsk04.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Petrol prices command attention.</span>
<span class="attribution"><span class="source">michaket/Shutterstock</span></span>
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</figure>
<p>We notice petrol prices because they are displayed clearly on well-lit signs of a specified size, as is required by law. We notice electricity bills because they are large and usually arrive only four times each year.</p>
<p>And because we don’t like them. We pay less attention to spending we like.</p>
<p>Every few years the Bureau of Statistics surveys 10,000 households to determine what they spent over the course of a <a href="https://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/A192ADE3ACB05BE5CA2581B4000E490A/$File/hes%20diary.pdf">fortnight</a>, and for less frequent expenses over the course of a <a href="https://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/7E4BD0330493AFA9CA2581B4000E48CC/$File/hes%20and%20sih%20prompt%20cards.pdf">year</a>.</p>
<p>It uses what results to create a “<a href="https://www.abs.gov.au/statistics/economy/finance/household-expenditure-survey-australia-summary-results/latest-release">basket</a>” of representative goods and services, weighted according to actual expenditure. </p>
<p>Food accounts for the bulk of the basket — 17.3%. Alcohol accounts for another 5.3%. That’s right, 5.3%. </p>
<p>Compare the 5.3% of the basket we spend on alcohol to the 3.2% of it we spend on petrol, or the 3.8% on electricity and gas taken together.</p>
<h2>Alcohol and food big ticket items</h2>
<p>We spend almost as much on alcohol as on health, and more than on clothes.</p>
<p>If you reckon that’s not your household, fair enough. The basket represents the average household, as does the consumer price index <a href="https://www.abs.gov.au/websitedbs/D3310114.nsf/home/Consumer+Price+Index+FAQs">(CPI)</a> which measures the prices of the goods and services in the basket in the proportions they are in the basket. </p>
<p>And if your reckon you’d never admit to spending that much on alcohol, you’re also right. Alcohol and tobacco are two of the rare instances where the bureau <a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/Previousproducts/6461.0Main%20Features62016">nudges up</a> what people report to take account of what’s actually sold.</p>
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<p>Contrary to a widely-believed myth, the cost of housing is in the index, both in the form of rents and in the cost of building houses, rather than the cost of land (that’s regarded as an investment, as is the ownership of shares which are also not included in the index).</p>
<h2>Most things included, though not illegal drugs</h2>
<p>Some things aren’t the index but should be — superannuation management fees (the bureau is working on it) and recreational drugs and prostitution, which are excluded <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Products/6461.0%7E2011%7EMain+Features%7EChapter+5,Coverage+and+classifications">because</a> it is “very difficult and indeed dangerous to obtain estimates of prices and expenditures, or to measure quality change”.</p>
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<a href="https://images.theconversation.com/files/413273/original/file-20210727-22-1hql7ni.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/413273/original/file-20210727-22-1hql7ni.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/413273/original/file-20210727-22-1hql7ni.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=970&fit=crop&dpr=1 600w, https://images.theconversation.com/files/413273/original/file-20210727-22-1hql7ni.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=970&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/413273/original/file-20210727-22-1hql7ni.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=970&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/413273/original/file-20210727-22-1hql7ni.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1219&fit=crop&dpr=1 754w, https://images.theconversation.com/files/413273/original/file-20210727-22-1hql7ni.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1219&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/413273/original/file-20210727-22-1hql7ni.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1219&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Shrinkage makes comparisons difficult.</span>
</figcaption>
</figure>
<p>Quality matters. When Cadbury shrank its large blocks of chocolate from 250g to 200g a few years back and then to 180g, it wouldn’t have been right to merely record the price change.</p>
<p>The bureau adjusted up the recorded price to take account of the fact that people were getting less chocolate. But other changes are less straightforward. What do you do when VB reduces the strength of its beers (as it did) or the new model laptop has twice as much memory as the one it replaced?</p>
<p>For computers the bureau adjusts down the recorded prices of new models in line with a US formula.</p>
<p>For cars — which these days have features not previously dreamed of — it consults a <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Products/6461.0%7E2011%7EMain+Features%7EChapter+9,Quality+change+and+new+products">panel of experts</a>.</p>
<p>For other changes it lets improvements go through to the keeper, leaving recorded prices unadjusted even though the are getting better.</p>
<h2>Beneath the hood, the CPI is changing</h2>
<p>The bureau used to record prices using handheld devices in supermarkets and by ringing up suppliers and getting quotes. In the last few years it has moved to getting almost everything electronically — stores hand over data from checkout scanners, petrol stations report when prices have changed and upload sales data, and the bureau “scrapes” advertised prices from the web.</p>
<p>With those changes has come a revolution in what it is able to do. It used to collect prices in only a small number of representative outlets (which is why the index was limited to capital cities) and it used to record only the prices of “<a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6403.0.55.001June%202011?OpenDocument">representative</a>” items. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/413244/original/file-20210727-17-1pihi03.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/413244/original/file-20210727-17-1pihi03.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/413244/original/file-20210727-17-1pihi03.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=967&fit=crop&dpr=1 600w, https://images.theconversation.com/files/413244/original/file-20210727-17-1pihi03.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=967&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/413244/original/file-20210727-17-1pihi03.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=967&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/413244/original/file-20210727-17-1pihi03.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1215&fit=crop&dpr=1 754w, https://images.theconversation.com/files/413244/original/file-20210727-17-1pihi03.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1215&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/413244/original/file-20210727-17-1pihi03.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1215&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The stand-in for bread was a sliced white loaf.</span>
</figcaption>
</figure>
<p>The stand-in for bread was the average price of a sliced white 650-750g loaf.</p>
<p>Better still, for the first time the bureau has information on how much is bought of each product at each price each quarter. This enables it make real-time adjustments to weightings in accordance with actual behaviour.</p>
<p>In 2011 when Cyclone Yasi destroyed banana crops in Queensland, the price of “fruit” recorded in the consumer price index surged to an unprecedented high. But the prices actually paid for fruit didn’t surge. Shoppers bought other fruits or canned fruit instead.</p>
<p>Next time that happens the CPI will scarcely move.</p>
<p>It’s making the index more of a cost of living index and less of a “cost of a fixed basket” index. It is happening for petrol too. The bureau is reporting the prices people actually pay, instead of the prices on offer.</p>
<p>None of this is to say that the CPI is perfect, but it would be wise to take the figure to be released on Wednesday seriously. It probably does a better job of recording changes in our cost of living than we’d do ourselves.</p><img src="https://counter.theconversation.com/content/165162/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This story is part of a series on financial and economic literacy funded by Ecstra Foundation.</span></em></p>We spend more on alcohol than we’ll admit, less on electricity and gas combined than we think.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1447322020-08-20T01:07:27Z2020-08-20T01:07:27ZThere will be no pension increase in September for the first time in 23 years. But there is a simple fix<figure><img src="https://images.theconversation.com/files/353568/original/file-20200819-24757-1sjjvpz.jpg?ixlib=rb-1.1.0&rect=22%2C77%2C7326%2C4814&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>The Department of Social Services has <a href="https://www.smh.com.au/politics/federal/no-pension-increase-in-september-20200818-p55mym.html">confirmed</a> Australia’s pensioners will not receive an automatic indexation increase this September, because inflation has gone backwards. </p>
<p>This will be the first time <a href="https://guides.dss.gov.au/guide-social-security-law/5/2/2/10">since 1997</a> the pension hasn’t risen with indexation. </p>
<p>Labor has quickly criticised the news the pension will be put “on hold”. As its Social Services spokeswoman <a href="https://www.lindaburney.com.au/media-releases/2020/8/19/morrison-government-confirms-pension-on-hold-for-first-time-in-quarter-century">Linda Burney argues</a>, “this is the worst possible time to be putting the squeeze on the household budgets of seniors and the most vulnerable”.</p>
<p>Prime Minister Scott Morrison has also been quick to <a href="https://www.pm.gov.au/media/press-conference-macquarie-park-nsw">point out</a> his government was not expecting this to happen and “will work through” the issues. </p>
<p>So, why haven’t pensions gone up in the middle of the pandemic? And what options does the government have to try to address this? </p>
<h2>How is the pension indexed?</h2>
<p><a href="https://guides.dss.gov.au/guide-social-security-law/5/1/8/50">Under current legislation</a>, pensions are indexed twice a year, in March and September. </p>
<p>This is done according to the higher of the Consumer Price Index or Pensioner and Beneficiary Living Cost Index (a <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook46p/CostLiving">cost of living measure</a> designed specifically for households that rely on pensions) over the previous six months. </p>
<figure class="align-center ">
<img alt="Elderly woman counting the money in her purse." src="https://images.theconversation.com/files/353625/original/file-20200819-24671-1ftottj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/353625/original/file-20200819-24671-1ftottj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/353625/original/file-20200819-24671-1ftottj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/353625/original/file-20200819-24671-1ftottj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/353625/original/file-20200819-24671-1ftottj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/353625/original/file-20200819-24671-1ftottj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/353625/original/file-20200819-24671-1ftottj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Pensions usually go up twice a year.</span>
<span class="attribution"><span class="source">www.shutterstock.com</span></span>
</figcaption>
</figure>
<p>As the Department of Social Services <a href="https://www.dss.gov.au/our-responsibilities/seniors/benefits-payments/pension-rates">explains</a>, when wages grow more quickly than prices, the pension is increased to a wages benchmark. The wages benchmark sets the combined couple rate of pension at 41.76% of male average weekly earnings. The single rate of pension is roughly two thirds of the couple rate, which works out at 27.7% of average male earnings.</p>
<p>So in normal times, indexation sees pensions maintain their real value or improve if real wages are increasing in the community. In March 2020, the single base rate of the pension increased by about <a href="https://guides.dss.gov.au/guide-social-security-law/5/2/2/10">$10 a fortnight</a>. </p>
<h2>But these are not normal times</h2>
<p>According to the <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6467.0">Australian Bureau of Statistics</a>, the Consumer Price Index and pensioner index fell by 1.9% and 1.4% respectively between March and June 2020. </p>
<p>And benchmarking to male earnings will will not help in September, because the current maximum basic pension rate of $860.60 per fortnight is 28% of average weekly earnings, which was <a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6302.0May%202020?OpenDocument">$1537.70 in May 2020</a>. So, this is slightly above the benchmark.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/i-will-never-come-to-australia-again-new-research-reveals-the-suffering-of-temporary-migrants-during-the-covid-19-crisis-143351">'I will never come to Australia again': new research reveals the suffering of temporary migrants during the COVID-19 crisis</a>
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<h2>Thank Kevin Rudd for the current system</h2>
<p>Australia’s indexation provisions were introduced in the Labor government’s <a href="https://archive.budget.gov.au/2009-10/additional/pensions_overview.pdf">2009-10 Budget</a>, following the <a href="https://www.dss.gov.au/about-the-department/publications-articles/corporate-publications/budget-and-additional-estimates-statements/pension-review-report?HTML">Harmer pension review</a>. At the same time, then Prime Minister Kevin Rudd increased the single rate of pensions by <a href="https://www.dss.gov.au/our-responsibilities/seniors/benefits-payments/pension-increases">$65 per fortnight</a>, the <a href="https://www.sbs.com.au/news/interactive-how-australia-s-pension-system-works">largest single real amount</a> since the age pension was first paid in 1909. </p>
<p>These new indexation provisions were generous compared to previous arrangements, given they take whichever is higher of the Consumer Price Index and the pensioner index, and also maintain higher benchmarks against wages. It is worth noting the Abbott government’s <a href="https://www.aph.gov.au/about_parliament/parliamentary_departments/parliamentary_library/pubs/rp/budgetreview201415/indexation">first budget in 2014</a> tried to change indexation of pensions so that they only increased in line with inflation. But this never got past the Senate.</p>
<p>So under the current provisions, introduced by Labor, the system is working the way it is intended. It is just that in these unusual times, none of these measures will result in a pension increase. </p>
<h2>What is really going on with cost of living?</h2>
<p>One important questions is: does the fall in the Consumer Price Index and pensioner index between March and June this year really reflect what has happened to the prices faced by pensioners?</p>
<p>The Bureau of Statistics has published a special analysis of <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/1359.0Main%20Features3Jun%202020?opendocument&tabname=Summary&prodno=1359.0&issue=Jun%202020&num=&view=">changes in prices</a> due to COVID-19, as well as the effect of the pandemic on average earnings.</p>
<p>This analysis shows a large part of the fall in the overall Consumer Price Index was due to <a href="https://theconversation.com/morrison-has-rescued-childcare-from-covid-19-collapse-but-the-details-are-still-murky-134798">temporary free childcare</a>, subtracting approximately 1.1 percentage points from the headline figure. However, because the weight of childcare in the pensioner index is lower, it is likely to have a smaller effect on that figure. </p>
<figure class="align-center ">
<img alt="Young boy playing in a cubby house." src="https://images.theconversation.com/files/353623/original/file-20200819-25336-1543htz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/353623/original/file-20200819-25336-1543htz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/353623/original/file-20200819-25336-1543htz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/353623/original/file-20200819-25336-1543htz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/353623/original/file-20200819-25336-1543htz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/353623/original/file-20200819-25336-1543htz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/353623/original/file-20200819-25336-1543htz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Free childcare during the pandemic may have had a disproportionate impact on cost of living figures.</span>
<span class="attribution"><span class="source">www.shutterstock.com</span></span>
</figcaption>
</figure>
<p>Another factor the Bureau of Statistics identifies is the <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/1359.0Main%20Features3Jun%202020?opendocument&tabname=Summary&prodno=1359.0&issue=Jun%202020&num=&view=">fall in rents</a> because of the <a href="https://www.abc.net.au/news/2020-04-15/coronavirus-victoria-landlords-renters-assistance-for-pandemic/12149210">range of supports</a> state and territory governments have put in place during COVID-19. </p>
<p>The bureau has not quantified this impact yet, but there is a possibility this may have a negative effect for pensioners. This is because rent reductions usually require tenants to have experienced a fall in income, which is unlikely to apply to pensioners (who will therefore be paying the same rents as before the pandemic).</p>
<h2>There is hope of a rise</h2>
<p>Morrison has already given a strong signal something extra will happen for pensioners. As he <a href="https://www.pm.gov.au/media/press-conference-macquarie-park-nsw">told reporters</a> on Wednesday, </p>
<blockquote>
<p>this is one of those issues that comes in a pandemic, you don’t expect those indexes to go negative. And as a result, budgets and others haven’t been prepared on the basis of them going negative … But the Treasurer [Josh Frydenberg] and I will work through those issues … And we’ll work out the exact response to the circumstances and will announce that when a decision has been made.</p>
</blockquote>
<figure class="align-center ">
<img alt="Scott Morrison at a press conference at Astra Zeneca laboratories." src="https://images.theconversation.com/files/353621/original/file-20200819-42976-1hzj6cc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/353621/original/file-20200819-42976-1hzj6cc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/353621/original/file-20200819-42976-1hzj6cc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/353621/original/file-20200819-42976-1hzj6cc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/353621/original/file-20200819-42976-1hzj6cc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/353621/original/file-20200819-42976-1hzj6cc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/353621/original/file-20200819-42976-1hzj6cc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Prime Minister Scott Morrison has flagged he will have more to say on pensions.</span>
<span class="attribution"><span class="source">Dan Himbrechts/AAP</span></span>
</figcaption>
</figure>
<p>If the government wished, they could consider a one-off increase in pensions, as used to be the case before the Howard government legislated for <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1314/SuperChron#_Toc382309868">benchmarking to wages in 1997</a>. </p>
<p>Alternatively, as the <a href="https://www.cota.org.au/news-items/call-for-stimulus-payment-for-pensioners-after-indexation-goes-backwards/">Council on the Ageing</a> suggested on Wednesday, they could provide another stimulus payment of $750 timed to go out before Christmas. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/i-will-never-come-to-australia-again-new-research-reveals-the-suffering-of-temporary-migrants-during-the-covid-19-crisis-143351">'I will never come to Australia again': new research reveals the suffering of temporary migrants during the COVID-19 crisis</a>
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</em>
</p>
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<p>As Morrison <a href="https://www.pm.gov.au/media/interview-sabra-lane-abc-am-6">noted</a>, there have already been <a href="https://treasury.gov.au/coronavirus/households/extra-payments-pensioners">two $750 payments</a>, in April and July, as part of the pandemic response. </p>
<p>A further payment could support consumer spending at what seems likely to be a very difficult time for the economy. A payment of $750 over a six-month period is a little under $60 per fortnight, which would be much higher than any normal indexation increase. But it would not be built into the rates for the long-term, which the government does not seem to want to do.</p>
<h2>Meanwhile, don’t forget JobSeeker support is going backwards</h2>
<p>Even more pressing, however, is the level of support to unemployed Australians. Under current policy settings, JobSeeker and related payments <a href="https://theconversation.com/jobseeker-supplement-cut-from-550-to-250-a-fortnight-after-september-143086">will fall by $300 per fortnight</a> from September 25. </p>
<p>Extending the current level of the <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/coronavirus-supplement">Coronavirus Supplement</a> until it is clear what Australia’s economic prospects are is a pressing necessity for the <a href="https://data.gov.au/data/dataset/jobseeker-payment-and-youth-allowance-recipients-monthly-profile">two million-plus</a> Australians receiving the Coronavirus Supplement.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/when-the-coronavirus-supplement-stops-jobseeker-needs-to-increase-by-185-a-week-138417">When the Coronavirus Supplement stops, JobSeeker needs to increase by $185 a week</a>
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<img src="https://counter.theconversation.com/content/144732/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Whiteford has received funding from the Australian Research Council and from the Department of Social Services. He is a Policy Advisor to the Australian Council of Social Service and a Fellow of the Centre for Policy Development. In 2008, he was appointed by the Australian government to the Reference Group for the Harmer Review of the Australian pension system.</span></em></p>Pensions are indexed twice a year. But COVID-19 has put a spanner in the works of what should be a regular increase next month.Peter Whiteford, Professor, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.