CPI comes in hot

JUNE KEY POINTS

THE ALL GROUPS CPI

  • rose 0.9% in the June quarter 2011, compared with a rise of 1.6% in the March quarter 2011.
  • rose 3.6% through the year to the June quarter 2011, compared with a rise of 3.3% through the year to the March quarter 2011.

OVERVIEW OF CPI MOVEMENTS

  • The most significant price rises this quarter were for fruit (+26.9%), automotive fuel (+4.0%), hospital and medical services (+3.4%), furniture (+6.0%), deposit and loan facilities (+2.1%) and rents (+1.1%).
  • The most significant offsetting price falls were for vegetables (-10.3%), audio, visual and computing equipment (-6.3%), electricity (-1.5%), domestic holiday travel and accommodation (-1.5%), milk (-4.6%) and toiletries and personal care products (-2.3%).

Analysis to follow…

Comments

  1. 26% for fruit – really?
    Paid $1/kg for pears and apples at the Vic Market a month ago.
    Are bananas the only fruit in the basket?

    • but, but…nobody has bought any bananas since the price went up! So who cares what they cost?

  2. Here comes stagflation..

    First home buyer grant boost recipients are now officially screwed. The housing market is dead dead dead from here. I genuinely feel sorry for them.

    • let me try get this strait:

      Inflation is higher, so we get less stuff for our money (AUD); still, AUD is going up compared to other currencies where you can get more for the same money?

      Logic?

      • That’s what I was wondering. I thought they must have made a mistake when I heard the story on the radio.

      • A simple way to look at it is this. Higher inflation means a greater likelyhood of the RBA increasing rates.

        When you can earn basically zero in the US or 6.5% here you can start to see the appeal.

        So higher return on your dollars. Euro is looking suspect, the US is just circus and the Aussie is looking pretty safe (at least compared to the other alternatives).

        That is my uneducated gasp of the situation….

  3. +26% for fruit!!!! After six months Yasi and the floods still aren’t done with our economy. Dammit I want my bananas.

    But a -2.3% change for toiletries and personal care products is nice. At least it’s getting cheaper to wipe your arse.

  4. So most of the rise is accounted for by things that are largely or completely unresponsive to hikes in interest rates.

  5. Sandgroper Sceptic

    How can it be that electricity costs are down? Most (all?) states and territories have electricity price increases now and in the near future.

    • I agree, in what planet have electricity prices come down, in NSW they are up at least 20%

      Goes to show how manipulated the index acutally is.

      • Probably the result of hedonics. Didn’t you know electricity is now x% better than the % that it just went up?

    • Usage of electricity is highest in Q3 and Q1 (depending on where you live. Typically lower in Q2 and Q4 due to milder temperature.

      So it’s a volume reduction in use leading to lower total cost for Q2 despite high unit costs.

      It will be gangbusters for Q3. Usage is highest and lots of people had price rises as of 1 July. So that’ll add to upward pressure this quarter.

      • Different China Fanboy

        Adam Smith, the coyote rejected your comment about the flawed modelling re: wholesale and retail electricity prices under the carbon tax. Do you have a rebuttal?

      • I just looked back at CeC’s Something for Everyone and Gilliard’s Mandate posts but I can’t see any rebuttal.

        Can you link it?

      • Actually I just found it.

        I don’t know why CeC makes all those comments about % increases being wrong and not reported. My original comments referred to the Treasury modelling report (http://treasury.gov.au/carbonpricemodelling/content/report.asp). Table 5.14 contains data on % price increases on average over the first five years of the scheme by region. I used these numbers in my example because it is the only place where Treasury has broken things down by region (which can be easily compared to the recent IPART determination in NSW providing a good benchmark). Even then the averaging over 5 years hides the greater rate of carbon passthrough in the first year or two. All the electricity data presented by Treasury is averaged over multiple years or regions or is presented in index terms. By design this makes it impossible to see what is really going on in their modelling. They’ve also averaged over two sets of numbers (MMA and Roam) so the averages would be unlikely to be internally consistent even if we could see the data. Treasury has since released the data behind their report and it turns out that there forecasts are actually based on a starting price of $20/t, not $23/t (and lower for later years too). They say they didn’t have time to fix it. So all there compensation is short simply due to that.

        Anyway, I have used $/MWh figures, I reported %’s in my comment to make it more accessible. I think I see where CeC is going wrong. I do agree with CeC’s comment that the impact in the Treasury modelling is around $20/MWh for a $23/t carbon price, but this is at the wholesale level. This is CeC’s mistake. He’s saying that wholesale prices go up by $20/MWh (2c/kWh), but then compares it to an end use retail price. All of the transmission/distribution losses and the retail premiums need to be added onto the wholesale effect to get you to an end use price increase that Mums and Dads pay. CeC says that end use prices are 20c/kWh ($200/MWh) which is true but he compares the wholesale increase to this – mistake. If you correct for this then the price impact is closer to a 13-15% increase for end users. As I said in my original comment, an extra 5% on an average household annual bill of $1800 is $90 so the average income earner is now undercompensated and low income earners are even worse off (as electricity is a regressive tax), that’s with them actually modelling a $20/t price in the first year and lower than reported prices in later years. The effect is amplified by businesses also facing greater increases and passing these through into goods and services.

        Of course this is predicated on Treasury’s passthough rate being correct. In the first couple of years, before investment starts in earnest, passthrough is likely to be greater than 85%. Treasury has averaged over this period on purpose. If passthrough was 100% for the first two years then the cost increases consumers see will be even larger at the start of the scheme. If Abbott keeps saying he’ll reverse it then uncertainty may delay investment in the low emissions plant needed to drop the passthrough rate. Passthrough rates of around 100% may persist for five years which would result in persistently higher cost increases than are implied in what Treasury has released to date.

        CeC – no hard feelings here. I’d also be happy to write a joint post with you if you’d be keen.

      • Sandgroper Sceptic

        So the electricity portion is based off some sort of electricity index? Wholesale market prices?

        I thought it was measuring just price not volume changes as well.

        As for usage (volumes) I totally understand that usage per day is down in the more mild (for southern states) Q2 and Q4. Still that means Q3 is going to show an absolute shocker…in the West our bill for electricity per kW has just risen 5% from July 1 2011, but we had massive rises in the previous 2 years (26.5% 2009, 10% in 2010).

    • Electricity has gone up in the new FY and will show up in the next quarter figures. The current CPI is for the June quarter.

  6. Just wait to see MSM titles like “Interest rate reduction hopes dashed by inflation” and “No relief in sight for first home buyers”.

    • How do you expect him to relate?

      “You’re a five-dollar boy and I’m a million dollar man” — Run DMC

      • Love the quote richard b…Hip Hop (true hip hop) is one of the few forms of music still asking hard questions of those in power – but I would love another Chuck D to come on the scene with an record about the debt crisis…plenty of powerful material I reckon

  7. What can we expect when wages are being pushed up constantly?

    Crystal ball….wait until interest rates go up, the unions will shout for wage increases and point to the inflation as the reason……

    • Wage share has been decreasing since the early 1970’s compared to profit share.

      Try again.

      • Bit simplified, and not very convincing. GDP/L is your labor productivity?
        I don’t think this reflects the structural change in an economy, I think this reflects the fact we can dig up more and sell it for more $$.
        Your example will not include the sale or use of natural resources.
        No cigar.

      • The issue is not about wage share as a percentage of profits. I am not having a whinge about % of GDP distributed to “the workers”, that’s a lefty thing.

        Ever understood the concept of productivity? This Grattan institute paper outlines declining productivity.

        http://www.grattan.edu.au/publications/069_productivity_challenge.pdf

        But increasing wages on declining productivity? Your self confessed lefty economist has a different handle on the subject, that’s all.

      • Also, run a budget deficit forever and everything is ok? How would we ever be able to have a SWF to prepare for bad times. His solution is write off the debt I guess. That’s ok if it’s not your Super fund who has the bonds.

      • A government can go into surplus only by taxing private sector debt growth or by being a net exporter. You pick what the country wants to be.

      • mmmmm – this (and the previous) government appear to want both – additionally tax the net exporter…brilliant idea???? No.

      • Yeah sure,

        This is a graph demonstrating wgae share since the early 1970’s

        http://bilbo.economicoutlook.net/blog/wp-content/uploads/2011/05/Australia_wage_share_1976_2010.jpg

        The same as indo. Your response to him was then arguing GDP/L, framing it in productivity, or supply side pressures. Quite a different framing to your opening comment o;

        “What can we expect when wages are being pushed up constantly?”,

        ..which is inferring demand side pressures.

        Going back to demand side pressures, ell here is the federal minimum wage compared to CPI.

        http://bilbo.economicoutlook.net/blog/wp-content/uploads/2011/06/Australia_FMW_real_wage_loss_June_2012.jpg

        Now that’s if we contend with CPI being accurately measured. If most cases with ‘official’ CPI, minimum wage earners alwats restore to purchasing parity after a lagging time frame.

        If official CPI has been understated, which many here contend, then their real purchasing power has declined for a long time.

        Thus they reduce aggregate demand, and that costs jobs.

        Now on the basis of your shifting the goal posts with the framing of productivity, real productivity growth has outstripped ‘real’ wages;

        http://bilbo.economicoutlook.net/blog/wp-content/uploads/2010/05/Australia_real_wage_labour_productivity_Sep_1997_Mar_2010.jpg

        ..bearing in mind that ‘real’ wages are indexied to CPI, which may be understated.

        If labour is seeing their purchasing power eroded for a generation, how can they be placing demand side pressures?

        Labour has only maintained the real purchasing power by replacing that wage erosion with debt.

        It is that ever increasing debt that manifested itself into our current problems.

        The only counter to this I have studied in increasing returns (in the Australian market anyway) to unincorporated profits. Corporated profits have not had as great returns, but still greater than labour.

        Return to capital, and especially return to rent has been too great, they have been the parties that have inflated all assets classes (outside of residential property).

      • I dont think that I changed the goal posts “..which is inferring demand side pressures.”. There are definately no demand side pressures…..Have you heard of the minimum wage? Regulation is the cause of the increase in wages not underlying demand…

        Then you argue (while ignoring the information I posted from the Grattan Institute) that “..bearing in mind that ‘real’ wages are indexied to CPI, which may be understated.” . Now I must adjust for a CPI “feeling” that you have.

        Then you outline that even though productivity has been increasing that the wage erosion has been replaced with debt? No real point here.

        I think your figures correctly reflect the situation… however I will disagree with your interpretation of these figures, as you do not account for technology. For example, if you have been to Coles lately you will notice that we can self check out items. This technology has replaced workers and therefore reduced the “L” in your figures without impacting “GDP”. Now with your reasoning you expect Coles to take the savings made from the technology and distribute this amonst the remaining workers. Unreasonable.

        Increases to the minimum wages rates will continue to provide incentive for business to invest in technology to reduce labour. That is how I interpret your figures. This is the paradox, the more the minimum rates are increased the more work will move overseas or be replaced by innovation, until it comes back to equilibrium. As a result your figures will continue to downtrend (with the exception of huge govt defiects) as long as we keep on regulating and increasing minimum wage rates.

      • ” dont think that I changed the goal posts “..which is inferring demand side pressures.”. There are definately no demand side pressures…..Have you heard of the minimum wage? Regulation is the cause of the increase in wages not underlying demand”

        Yes, what of it?

        It’s a major component in sufficient aggregate demand. It’s what spurs jobs to begin with.

        “Then you argue (while ignoring the information I posted from the Grattan Institute) that “..bearing in mind that ‘real’ wages are indexied to CPI, which may be understated.” .

        Now I must adjust for a CPI “feeling” that you have.”

        Erhh no, I am not the only one here that thinks offical CPI has been understated, its probably the prevailing theme on this board.

        I will express that as my opinion, and what I am inferring is that wages in real terms have been eroding for a generation.

        Under those circumstances, wages, minimum are not, are not a factor in any appearance of inflation.

        After all your first question was “What can we expect when wages are being pushed up constantly?”

        I know it’s rhetorical, but in your head, you’re giving an answer to the wrong question. Wages in our current environment have nothing to do with it.

        ..

        “Then you outline that even though productivity has been increasing that the wage erosion has been replaced with debt? No real point here.”

        There is a very vaild point, you’re bordering on obtuse here.

        Productivity hasn’t been a problem until the 2nd half of the previous decade. What has been an issue has been the disporportinately large share of this increased productivity going to capital and rent, and a disproportinately small portion going to labour.

        A feature of this new product coming to market, is the ability of the market place being able to afford to consume it.

        With insufficient remuneration for labour, this product has only been consumed by access to debt, an ever increasing of debt, facilitated by ever decreasing lending standards.

        If either of those two factors had been more strict, then the increased supply of product would not have been able to be consumed.

        “I think your figures correctly reflect the situation… however I will disagree with your interpretation of these figures, as you do not account for technology. For example, if you have been to Coles lately you will notice that we can self check out items. This technology has replaced workers and therefore reduced the “L” in your figures without impacting “GDP”.”

        No, I am aware of these structural changes in the micro environment, but who is receiving the productivity dividend?

        If it all goes to capital and rent, i.e. Coles shareholders and Frank Lowy, then thre is no gain to the economy. In fact it is bad, because both of these are parties that with slow down the velocity of money.

        Without recompense to the consumer, who can therefore have a reduction of the ‘Coles spending habits’, to generate further income in other sectors, or idealically new sectors, then no new jobs are created, and the laid off Coles checkout staff, with now a situation of no income, reduce aggregate demand.

        “Now with your reasoning you expect Coles to take the savings made from the technology and distribute this amonst the remaining workers. Unreasonable.”

        Erhh no. I’m saying a proportion should be passed onto those in the macro economy who make their way by selling their labour. it is clear above what I mean.

        Spending is some other parties income.

        “Increases to the minimum wages rates will continue to provide incentive for business to invest in technology to reduce labour. That is how I interpret your figures. This is the paradox, the more the minimum rates are increased the more work will move overseas or be replaced by innovation, until it comes back to equilibrium.”

        Erhh no, sh*tty low wage jobs in the tradable sector should be exported. It’s always a good thing when rent-seeking bottom feeders are driven from the economy, otherwise we collectively are subsidising return to capital by the drag it causes.

        Keeping low paid jobs in the economy doesn’t incentivise management to improve as long as a dividend returns to capital. We don’t need them, flash this trash out, and let innovation be rewarded as product suppliers.

        Inversely, high paid jobs comes from investment in skills and training. Places like Singapore and Switzerland acknowledge this.

        They have no natural resources, they only have human resources. To maximise the return on these resources, they invest in them.

        “As a result your figures will continue to downtrend (with the exception of huge govt defiects) as long as we keep on regulating and increasing minimum wage rates.”

        LOL

        The countries in the crapper right now are the countries with excessively low minimum wages.

        Low minimum wages entrench low end, exportable jobs, with greater competition of undercutting costs. it is a race to the bottom, populated by rent seeking bottom feeders.

        Places with high minimum wages require all sectors of industry to innovate to keep pace, or else exit the economy. I have no problem with dead end rent seekers being flushed out, they are replaceable.

        But the innovation operators/sectors that remain will tend to have irreplacable features that can’t be replicated elsewhere. Thus their product will tend to be less elastic, stabilising aggregate demand.

      • Hmm. Now this is difficult as you seem to have your own lingo, I am not sure what a “bottom rent feeder” or a “rent seeker” is but from what I understand..
        you think higher wages is the precursor to an innovative economy. Whereas I think it is the opposite way around.

        “But the innovation operators/sectors that remain will tend to have irreplacable features that can’t be replicated elsewhere. Thus their product will tend to be less elastic, stabilising aggregate demand.”
        Or we will create a system that is dominated by oligopolies and cartels……sound familiar?

        Competition is natural and healthy if regulated properly. Underpinning any price (i.e. wages, exchange rates, interest rates, rents, etc) will always lead us towards to a distortion or a rebalancing senario, however theoretical.
        Please note I said “regulated properly” as opposed to “no regulation”.

  8. Australia is not a net exporter , it has a current account deficit. Australia is self sufficient in its resources , food , energy , water , giving this up for electronic dollar reserves created out of thin air does not seem very bright to be.