Relax. Prices Aren't Skyrocketing


"Everyone’s cost of living is just going to go up and up …"

Tony Abbott was having another media moment, this time at a shopping centre in Coffs Harbour. And top of his agenda was — you guessed it — Labor’s carbon tax.

"This carbon tax is just going to make a bad situation worse," he told journalists. "It is another smash and grab raid by government on small business."

The rising cost of living has become the key plank in the conservative argument against action on climate change. While the costs and benefits of introducing a price on carbon pollution have fiercely divided the nation, the inexorable increase in the prices of everyday goods and services is something we can apparently all agree on.

This is certainly the position being pushed by both major parties and much of the media. It’s been going on for some time — arguably since at least the 2007 election at least. Here’s Wayne Swan in August last year: "There’s no doubt that there are cost of living pressures out there and some people are feeling the squeeze …"

And here’s Julia Gillard in March: "I know many people are concerned about prices …"

The media is joining in too. The political commentariat has largely bought the Coalition’s line about rising costs of living, with little scrutiny of the economic fundamentals. A typical example came this week in an op-ed from the Courier-Mail’s Margaret Wenham.

Going through her old bills, Wenham totted up the recent increases in things like rates, electricity, insurance, petrol and car registration and concluded, "I’m now going backwards financially — my 3 to 4 per cent a year award pay rises are no match for the continuous across-the-board hikes."

After declaring that "these rises have been so far above the CPI as to almost defy belief", the senior editor working for a good middle-class wage at News Limited issued a clarion call to "bring on the people’s revolution".

So, prices must really be going the roof, right?

Actually, no. According to the Australian Bureau of Statistics, the latest figures show the CPI rose only 0.4 per cent for the December quarter.

The Reserve Bank agrees. "Consumer price inflation has declined significantly over the past couple of years," the bank declared in its February statement on monetary policy.

Look into the CPI figures and the media hysteria over rising prices seems hard to justify. Yes, some prices have certainly gone up — most notably tobacco, after the Gillard government brought in a big hike in tobacco excise early last year. Other big movers in the last year include health, housing and education, which all went up by 5 per cent over the year to December. And, as we discussed last week, electricity bills have been spiking in recent years owing to big investments in new power poles and cables by electricity generators.

But in some parts of the economy, prices are falling. The obvious example is computers. Thanks to the world’s hyper-competitive computer manufacturing industry, you can buy a computer for a price and with a level of processing power that would have astonished a hard-core nerd even a decade ago. Right now, Harvey Norman and OfficeWorks are both offering full-featured laptops that can comfortably perform nearly any task except gaming or video editing for under $500. Even three years ago a computer with similar specs would have cost well above $1000. That’s some impressive deflation.

It’s not just computers. Clothing and footwear prices fell nearly 5 per cent last year. The reason is not just falling costs of production, but the incredibly tough retail environment. Since the 2008-09 global financial crisis, Australian consumers have put their wallets back in their pockets. This "new normal" seems to reflect a long-term trend in which consumers have decided to pay down their mortgages and credit cards, and start saving again. As the Reserve Bank writes, "the moderation in consumption spending and corresponding rise in the saving ratio appear to reflect a change in households’ attitudes towards debt and financial vulnerability."

Retailers understand the new normal all too well — those of them still in business, that is. 2010 and 2011 has seen a string of indebted retail groups go under, after failing to entice enough consumers to flash the plastic. The latest was the Colorado Group, which called in the receivers last week. Even the vastly profitable oligopolists Coles and Woolworths are currently locked in a nasty price war for household basics such as milk, eggs and bread.

For every example of a basic necessity rising in price, you can find an example where things have got cheaper. Cars, for instance. As Ian McAuley demonstrated here on New Matilda in March, it’s cheaper to own and run a car now than it was 20 years ago. Airfares, mobile phone plans, IT services and all manner of manufactured goods also fall into the cheaper category.

And if we look at the income side of the equation, Australian pay-packets are holding up well. The Reserve Bank points out that "since 2004, nominal household disposable income has grown strongly, at an annual average rate of 7.3 per cent." In that time, the price of a basket of goods and services has increased at an average annual rate of only 2.9 per cent. In other words, household income is outstripping inflation. That’s not surprising given that unemployment has been below 6 per cent for nearly that entire period.

Of course, perhaps it’s just the merchant bankers and the fat cats earning the big bucks who are doing well. What about pensioners and those on minimum wages? There is slightly more truth in the argument that lower-income earners are doing it tough. Pensioners, for instance, are not big buyers of consumer electronics, but they still have to pay increasing imposts for rates, water and electricity bills.

But even here, things are not as bad as they seem. For instance, Wayne Swan pushed through a significant increase in the base rate of the pension in 2009, as well as big tax cuts for low-income earners through the Low-Income Tax Offset. Although this Labor government seems to get surprisingly little credit for it, its credentials in terms of looking after "the battlers" are surprisingly good. According to the raw data from the ABS, the Pensioner and Beneficary Cost of Living Index rose by 4 per cent in the year to December. But the pension is carefully indexed against inflation — not just to the CPI but also to average male weekly earnings — ensuring that it increases in line with rising prices. Since 2009, the pension rate for both couples and singles has increased by more than $100 a fortnight.

None of this means that the pain being felt in some sections of the community isn’t real. Some people really are doing it tough. For those of us who have lost our jobs and have to survive on Newstart, it’s never been tougher to make ends meet.

For those of us lucky enough to enjoy a full-time job with a good wage — like newspaper editors, for instance — life in Australia in 2011 is generally not that bad.

But no-one wants to say that — certainly no politician. In 2011 the universal message is "we feel your pain" — whatever your particular pain happens to be. You’d have to go back to 1957 to find a politician in power prepared to tell voters, as British Prime Minister Harold McMillan did, that they’ve "never had it so good".

Leave it to Mark Latham to make the controversial and unpopular point. The former Labor leader told Robert Manne last week that cost of living pressures are really just a political "code for greed".


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Ben Eltham is New Matilda's National Affairs Correspondent.