One of the big worries about the release of quarterly inflation data is the way in which the data – whatever quality it is – is spun, misinterpreted and misused for a variety of agendas.
The Federal Treasurer was quick to let slip what the Labor Government thinks of the issues in the deep discounting of supermarket prices which is putting the squeeze on milk processors and bread makers, suggesting that cheaper milk and bread were saving the consumer money in the face of other rising costs of living. Fingering fruit prices as one of those gains, the “Yasi banana spike” is in fact the same “Larry banana alibi” he criticised John Howard for using.
The CPI numbers have their usual problem with weighting, assuming that the same volumes of fresh food items are purchased at higher prices which have occurred since weather events pruned crops. You also have to wonder about the different readings. While the ABS suggests food inflation is up 4.3%, Woolworths and Coles booked deflation of 3.6% and 1.2% respectively.
But the wave of naive media commentary that instantly connected the CPI numbers to increased pressure for interest rate rises is very unhelpful to anyone selling through retail or those households worrying about living costs.
Basic economic strategy says that when inflationary pressures build, interest rates should be a device used to quell demand. When you drill into the CPI numbers, not much of the rise in CPI actually relates to “heat” in the economy.
The big upward movers in the March quarter CPI had very little to do with tightening supply of goods and services driven by stronger consumer spending.
Fruit & veg rises were clearly due to extremes of weather. Lamb prices - which offset price falls in other meat lines - are soaring due to a global shortage of sheep and in line with higher wool values. Energy costs are being hiked to reflect higher costs of coal thanks to the appetite of the Chinese and to presumably soften us for the coming impact of a slug on emissions. Child care rises are probably an aftershock of a major provider going belly up and a lot more mums going back to work, given we have nestled near full employment again as a country. Healthcare costs are simply catching up with the reality of the underfunded infrastructure to care for the aging population and governments allowing more of these costs to come direct to the user. Meanwhile petrol costs are bringing a higher world oil price into our fuel tanks. Tobacco price rises are based on excise rises.
In fact, as you scroll through the datasheet that accompanies the release from the Australian bureau of Stats, so many of the food and household goods categories which you would expect as indicators of strong demand have minus signs on the year-on-year CPI change.
It would seem pretty unlikely that the Reserve Bank will pick these numbers up as a signal that it needs to apply more downward pressure on spending, and indeed crank up interest costs for farm businesses. Regardless of what the RBA says in response to these numbers, the damage in perception which will drive more caution into household spending has probably been set.
The two-speed economy will roll on, but those operating at the lower speeds have just taken another hit.
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