The Reserve Bank of Australia’s monthly announcement on the official interest rate brings with it a flurry of media attention about the cost of living and mortgage payments.
Sure, we get that when the interest rate rises, prices go up, but why when interest rates decrease or stagnate do prices continue to go up? Are we being had?
The consumer price index (CPI) rose 0.6 per cent for the December quarter and 4.1 per cent for the year ending December 2024. The current official interest rate is 4.35 per cent.
According to the Australian Bureau of Statistics (ABS), annual food inflation eased to 4.5 per cent in the December quarter, down from 4.8 per cent in the September quarter and the peak of 9.2 per cent in the December 2022 quarter.
Should our grocery prices be stablising as a result? Anyone who tracks their supermarket spend will report that prices are increasing well above interest rates and the CPI, and never ever seem to fall. So what’s going on?
Market floor
Well, the first issue is food and grocery items are in regular demand, and we can’t put off buying them until we save up, such as for a car or holiday. Solid demand will always put a floor in pricing.
The second issue is that inflation is the rate at which prices fluctuate; it does not correspond to prices decreasing. So, as inflation drops, prices do not change, but the rate at which prices increase will reduce.
Australia has only ever had negative inflation – deflation – three times since the ABS started taking records.
That is the pure economics of it. And, unfortunately, in Australia we suffer from a few other problems, the biggest being the concentration of supermarkets in the duopoly of Coles and Woolworths.
With only two major players, competition is reduced, and their motivation to cut prices is almost zero. Their motivation to increase prices is what drives their business model, and as a publicly listed company, so it should.
Are they taking advantage of their market power? Almost certainly. Can we prove it? Probably not.
Unless there is some sort of ‘smoking gun’ in the shape of an email trail or whistleblower, Coles and Woolworths can quite rightly say they are maximising shareholder profit, which is their main purpose, not selling cheap groceries.
Aldi has given them a bit of a shake in the past 10 years, but now consider the market ‘mature’, that is, they are not going to make much more investment in Australia.
Cheap pricing
Part of that investment was cheap pricing to lure consumers away from the big two. However, now they have a regular customer base, Aldi prices are much more in line with the two major chains.
IGA and other independents are another case altogether.
Although IGA operates under the same branding, the stores are owned by individuals, not a large corporation, so they don’t have the same power to influence the market.
IGA owners also all buy the majority of their stock through a company called Metcash, whereas Coles and Woolworth use their own supply chain.
As a business, Metcash also wants to maximise profit and tries very hard to charge its clients – IGA owners – as much as it can, so they are at the mercy of Metcash’s pricing policies.
Have you noticed prices rising on your grocery shop? Have you had to cut back on any items as a result? Why not share your experience in the comments section below?
Also read: How Coles and Woolworths maintain their power over the grocery market