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CPI data

Like most males, I detest supermarket shopping. Pushing a trolley up and down the aisles is a mind-numbing experience. My fundamental aim is to get in and out of the store as quickly as possible. My poor behaviour annoys my wife who assures me that she also finds little joy in grocery shopping.

Whereas I rapidly “hunt” down items, Beverley slowly “gathers” what we need. Thus, we follow the traditional evolutionary roles developed in the African Savannah. Our classic caveman/cavewoman behaviour mirrors the Hunter-Gatherer Theory of Markets and Shopping.

Outside the supermarket “jungle”, there is a basket of goods which genuinely interests me - the items which make up the Consumer Price Index (CPI). The CPI measures the change in the cost of a fixed basket of goods and services bought by Australian households. 

The price of these items tends to rise over time placing upward pressure on the cost of living. This is a worry for many Australians which is why the government closely monitors the costs incurred by households in buying the goods and services necessary to maintain their standard of living.

You will often hear politicians expressing concern for Australians facing increased cost of living pressures. It’s repeatedly claimed that families are suffering as prices are constantly rising. But this is only half of the story. The other side of the cost of living equation relates to incomes. 

The reality is that wages and government benefits also tend to rise over time. The more pertinent question, therefore, is whether prices are rising at a greater pace than wages and benefits. It follows that if average income is rising faster than prices, the cost of living is effectively falling.

A report titled, The Cost of Living in Australia, commissioned by fund manager, AMP, put it this way:

Every year the perception seems to be that it gets harder to afford the basics. But are prices really outpacing our incomes? While some prices such as electricity and petrol have certainly shot up in recent years, many other prices have fallen such as televisions or clothing. Could it be that we’re placing greater expectations on ourselves and what our standard of living should be? 

In tracking changes in the cost of living, the CPI provides a robust measure of price inflation for the household sector. As general rule, rises in the cost of living closely match the rises in inflation. Given this, the CPI is a widely-quoted and well-known economic indicator and for good reason.

Trends in the CPI are a major driver of the Reserve Bank of Australia’s (RBA) interest rate decisions. The principal objective of monetary policy is to control inflation. Australia’s inflation target is expressed in terms of the CPI. The RBA has adopted a 2-3 per cent inflation target and does not like to see inflation run above this comfort zone.

But the RBA has been unhappy for some time that it only receives CPI data from the Australian Bureau of Statistics (ABS) on a quarterly basis. It has long wanted the CPI published monthly and has publicly noted that Australia and New Zealand are the only developed countries not to do so.

“The Bank is strongly of the view that a monthly CPI constitutes best practice, and that more frequent data on prices would assist in the assessment of inflation trends in the economy,” the RBA said in its submission to the 16th Series Review of the CPI. 

There’s no doubt that a monthly rather than a quarterly CPI publication schedule will help improve Australia's monetary policy framework. Timely information is crucial to the conduct of monetary policy and monthly data would eliminate the current backward-looking bias of monetary policy. 

Speaking of looking backwards, I forgot to mention that I enjoy shopping for gadgets. So, I must go now as I’m off to my local mega hardware store which has aisles and aisles of big-boy’s toys and other “hunting” tools. Strange how Beverley hates hardware shopping - go figure?

 

Regards

Paul J. Thomas, CEO

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Posted Monday, 2 May 2016    View Comments 0 Comments    Make a Comment Make a comment  

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