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.
Outlier 