Outlier

In the past couple of months, the global supply of what is arguably our most important commodity has taken a massive hit.

We are not talking here about reasonably priced coffee, job security or even ‘common sense’ – though each has arguably become significantly rarer in that time.

No, the biggest casualty has been trust, and that should worry us all.

You might be thinking that, outside family and a circle of close friends, trust is not really a thing and, anyway, it has been in short supply for a long time.

But the evidence says that, in both instances, that is not actually the case.

In fact, it is trust – more than oil, more than mobile phones, more than You Tube – that makes the world go round.

Just think about how much trust is involved in an everyday transaction like ordering a home-delivered pizza online. You choose the restaurant, select the pizza (and probably a drink and, maybe, that cheesecake you like), enter your credit card details and hit ‘Order’, all without talking to a soul.

You are trusting that the store exists, that it makes pizzas that are safe to eat and come as described in the menu and that the payment system it uses is secure. Then there is trust that your meal will be handled and delivered hygienically and as expected, and that your personal details will be managed securely.

Sure, there are theoretically safeguards in place that can be used if something goes wrong at any step of the process, including police, banks and financial system regulators and social mechanisms like Google reviews.

But using any of them takes time and effort – of the kind that could quickly outweigh the convenience of a home-delivered meal. Would you really call the police if a pizza order went awry? Maybe, but quite probably not.

It is actually trust that makes everyday transactions like this feasible.

The alternative would be to personally deal with each person in the process, check that they are who they are, ask to see the systems they use to make the food, manage the credit card payment, select the delivery driver, then contact the delivery driver to check their bona fides etc etc. It would quickly become unfeasible.

Trust is also involved in transactions between businesses and between nations.

When countries sign up to a deal to abolish tariffs or accord reciprocal rights to their citizens or agree on a common set of regulations, they trust that each will abide by the terms of the agreement.

Of course, this trust is qualified. It is usually backed by a system of monitoring and reporting to help ensure there is no backsliding.

It is the same in the welfare system. The government provides a payment, but in exchange the recipient has to show that they meet the eligibility criteria.

These accountability systems don’t come cheap, and contribute mightily to the “inefficiencies” that Musk/DOGE is supposedly targeting. But they are essential in helping build and maintain confidence that things are working as intended.

Having confidence in government systems allows most of us to get on with our lives without having to worry about whether, for example, dangerous cars could be imported and let loose on our roads, or that the water coming from our taps is safe to drink.

Heavens, it might even enable someone born into privilege and wealth to amass an outrageous fortune.

Something for those currently assaulting the foundations of trust to ponder.

We’ve all heard the stories about young (and not-so-young) people being effectively locked out of large parts of Sydney, Melbourne, Brisbane and other cities by soaring housing costs.

The hunt for an affordable home, whether to buy or rent, is drawing many to the urban fringe. It is causing others to forsake the big cities altogether and opt for a cheaper life in the regions[1].

It might be tempting to shrug and take the attitude that this is not such a big deal. After all, plenty of people in the past have been forced to live where they can afford, not necessarily where they choose. Why should the current crop of aspiring home owners (and renters) be any different?

A new research note from the e61 Institute gives a compelling reason why, and why we should all care.

It is well established that cities are enormous engines of economic activity, growth and wealth[2].

This is not to say that regions are not incredibly important to the economy and society, because they are.

But the numbers tell the story. According to estimates by SGS Economics and Planning, in 2018-19, Sydney accounted for 24 per cent of national GDP and Melbourne 19.3 per cent, while regional NSW’s share was 8 per cent and regional Victoria 4.1 per cent. Only in Queensland, the nation’s most decentralised state, were regional areas (9.7 per cent) slightly bigger than the capital (Brisbane, 9.3 per cent)[3].

Cities derive their economic power from the fact that workers and firms are clustered so close together, according to e61 Institute researcher Matt Elias.

This proximity means new ideas travel fast – faster than outside cities. Workers and firms learn from each other, just through everyday interactions.

As Elias puts it, “cooks exchange better cooking techniques, and software engineers exchange code for faster algorithms”.

This constant process of learning and exchange helps all, but is particularly beneficial for younger workers.

An e61 Institute study of wage gains found that workers of all ages who move from regions to cities enjoy significantly faster wage gains than those who remain in the regions. The effect is particularly marked among those in their 20s and 30s.

But in the past two decades, a separate study by e61 researcher Elyse Dwyer shows, there has been an exodus of people from Sydney, including a large contingent of young families seeking more affordable housing.

According to Dwyer, for the last 20 years Sydney has been losing about 0.5 per cent of its population each year to other parts of Australia, particularly regional areas like Wollongong, Newcastle, Canberra and the Gold Coast.

This may be costly for us all.

Ask most economists about what drives up wages (and hence, living standards) and they will say it mostly comes down to productivity – essentially, how much is produced for a given amount of labour.

During the 1990s Australia, like much of the world, went through a productivity boom.

Productivity growth averaged 2.2 per cent during the period. But since then, productivity gains have slowed dramatically. In the past five years they have averaged just 0.52 per cent a year[4].

Among those worried about the productivity slowdown is the Reserve Bank of Australia.

It frets that with productivity barely growing, the wage rises being secured in the current tight labour market are adding to business costs without being offset by cheaper production costs.

The risk is that this will hold up, and possibly drive up, the prices businesses charge, delaying the fall in inflation and forcing the RBA to hold interest rates higher for longer.

No-one yet knows why productivity is growing so slowly.

There are plenty of likely culprits, including labour hoarding by employers, lower business investment and challenges in the adoption of the technological breakthroughs.

But perhaps one contributor is exodus of many young workers and their families from economically dynamic (and human capital-enhancing) inner-city areas.

The hunt for affordable housing could be costing all of us in terms of higher inflation and interest rates – homeowners, homebuyers and renters alike.

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[1] City or bush? Where prices have grown the most in recent years

[2] SGS-Economics-and-Planning_Economic-Performance-of-Australian-Cities-and-Regions.pdf

[3] SGS-Economics-and-Planning_Economic-Performance-of-Australian-Cities-and-Regions.pdf, p10

[4] Australia’s productivity performance – Productivity Commission

If inflation in Australia is slowing, why aren’t we feeling it?

I doubt that I’m the only one to wonder if inflation really is slowing as much as the stats say.

According to the Australian Bureau of Statistics, annual prices grew on average by 3.8 per cent in the June quarter – not that far above the long-term average since Reserve Bank independence of around 2.5 per cent.

But go to the checkout or be hit with the latest bill from your power company, doctor, landlord or mechanic and it doesn’t really feel that different from a year ago when the consumer price index (CPI) was rising by around 6 per cent.

While wages might be moving, any increase seems to disappear in a puff of inflation.

This is not just an Australian phenomenon.

Well regarded US-based economist Adam Tooze admits that recently he, too, has been suffering from “cognitive dissonance” when it comes to inflation.

In his latest Chartbook blog, “From anti-core to felt inflation”, he recounts how he’s been “brought up short by jaw-dropping price hikes for everyday items – milk, fruit, veg, a cup of coffee, a loaf of bread, toothpaste etc. There’s been a price shock, all right.”

This is despite official data showing annual inflation in the US slowed to just 2.4 per cent in the September quarter.

So, what’s going on? Are statisticians just completely out of touch? Or are Adam and I?

Adam’s conclusion, drawing on the work of Bloomberg columnist John Authers, is that people aren’t actually going crazy.

What is happening is that the costs of daily purchases like food and fuel are still rising faster than inflation, but in the official data this is being offset by a slowdown in other costs less prominent in our daily lives.

I thought I’d check out if a similar phenomenon is playing out here in Australia.

I gathered ABS data on inflation for a basket of 11 regular household purchases in Sydney and looked to see how this matched up against the overall inflation rate. My sample goes back to late 2021, just before inflation really took off.

The 11 items were: bread, meant and seafoods, fruit and vegetables, dairy, tea and coffee, take away food, alcohol, rent, medical and hospital services, electricity and fuel.

To match up with contemporary experience, I then honed in on the period since the start of this year.

In the six months to June, overall inflation in Sydney rose 1 per cent a quarter.

But over the same period the price of many basics consistently exceeded that pace, and in several cases was more than double.

 The biggest surprise was the rise in the cost of fruit and vegetables, which rose 2.4 per cent in the March quarter and surged by 6.3 per cent in the June quarter (see table below).

Rent and medical costs both rose by more than 2 per cent in each quarter, while fuel – after coming down a little in the March quarter – rebounded to rise by 2.6 per cent in the June quarter.

Item	March qtr 2024 (% change)	June qtr 2024 (% change)
All CPI	1.0	1.0
Fruit and vegetables	2.4	6.3
Alcohol	1.1	1.5
Rent	2.0	2.0
Medical and hospital	2.1	2.0
Automotive fuel	-0.5	2.6
Meat	-0.8	1.9

Source: ABS June qtr CPI report

Admittedly, this is not a highly rigorous or comprehensive evaluation.

But even this back-of-the-envelope exercise suggests why I (and I suspect many others) find it hard to reconcile the slowdown in official inflation figures with my own experience.

In this instance, we can both be right.

Inflation is slowing overall. But in the costs that bite into our household budgets on a daily, weekly or monthly basis, many are still rising at a solid clip.

* This was written a couple of weeks ago. While economists tip September qtr data out today to show headline inflation in Australia has slowed to less than 3 per cent, I argue this piece still stands.