Price rises set to hurt the most

It was a strange year for cost-of-living rises and falls in 2018, with the subject dominating the political conversation at a time when inflation has been very low.

It’s been a timely reminder that price increases are only half of the cost-of-living puzzle. The other half is incomes.

People notice the difference between how fast their incomes are rising and how fast prices are increasing. While inflation has been low, the Consumer Price Index (CPI), which measures price rises for the average household, has increased by only 1.9 per cent over the past 12 months. Average wages have increased by almost the same amount.

Low price rises and low wages growth have meant that indexed increases in the Age Pension have also been small.

This means that real incomes – the increase in income minus the increases in inflation – haven’t moved much at all. It is those stagnant real wages that are putting pressure on household budgets and that have, in turn, focused attention on the price of everything.

Over the past year, most of the focus around cost of living has been on electricity prices. The political class has talked about it endlessly and it has consumed plenty of space in newspapers and on radio and television. The interesting thing about the past 12 months is that electricity prices have increased at about the same rate as the CPI – 1.8 per cent for electricity versus 1.9 per cent for the CPI.

Yes, you read that correctly. Electricity prices haven’t increased much over the past year. This is mainly because the big price increases occurred more than 12 months ago. Two years ago, electricity prices increased by 11 per cent. Those increases, at a time of stagnant real wages, had such a big impact that we’re still talking about it today.

So, if not electricity prices, what were the big price movers? Price rises were dominated by the increase in petrol prices. Automotive fuel (which is mainly petrol and diesel) increased 21 per cent – almost twice as much as electricity did two years ago.

Other big movers in the past 12 months were domestic holiday travel and accommodation, which have increased 7.4 per cent. International travel and accommodation increased only by 1.4 per cent.

There were also big increases in the price of fruit and vegetables. Fruit was up 6.1 per cent and vegetables 4.1 per cent. This is in part due to the drought conditions throughout large parts of Australia. Tobacco also continued to increase significantly (14 per cent), mainly because of taxes. Insurance rose by 4.2 per cent.

However, not all prices went up. Some prices fell, offsetting the pain of price rises. The biggest falls came in audio, visual and computing equipment, which fell by 9 per cent. Communication, such as mobile phone and internet charges, fell in price by 4.3 per cent. Another big drop came from household textiles, which fell 7.7 per cent.

Housing has been an interesting phenomenon over the past 12 months. Not because it has been a major mover either up or down, but because it has been surprisingly flat. Housing increased just 1.6 per cent and most of that was in the last three months of 2017. After being such a driver of cost-of-living pressures, it has been quiet since house prices have cooled. While the flow-on effects to things such as rent take time, if house prices remain flat through 2019, we may see lower rental increases that will help the Cash-Strapped tribes.

What’s in store for us in 2019? They say economic forecasters exist to make astrologers look good. So everything I’m saying now should be taken with a lot of healthy scepticism. But here are some things to think about.

House prices are likely to continue to be fairly flat after the crazy increases of previous years. If this is the case, then housing costs are also likely to be flat.

Petrol prices will continue to be driven by two things that Australia has limited influence over – the oil price and the exchange rate. Oddly, the biggest influence on both is likely to be the trade war between the US and China. If tensions ease, then petrol prices are likely to stabilise and decrease. If the trade war gets worse, then expect oil prices to go up and the exchange rate to fall. This will be a double whammy for motorists.

Electricity prices are probably the hardest to predict. This is because the problem is largely linked to a lack of clear policy on greenhouse gas emissions. As our ageing coal-fired power stations come to the end of their lives, investors need certainty to sink money into their replacements and the chaos at the federal level is simply not providing that.

If the political class does sort out action on emissions, then electricity prices could actually fall as new generation supplies come on line and force down wholesale electricity prices. If the mess continues and there is no real action on emissions, then investors will stay away. The coal-fired power stations will become increasingly unreliable and the lack of competition in electricity generation will keep prices high.

The likelihood of an El Niño weather event in 2019 is high. This will mean drought conditions are likely to persist. Coupled with rising temperatures, food production will be affected and have an impact on staple foods such as fruit, vegetables and meat.

It’s an election year, so expect much talk. But as long as income growth, including increases in the Age Pension, continues to just keep up with price increases, people will still feel financial pressure.

The Government has little control over most price increases, but the inability of workers to demand and get higher wages is a problem with which it will have to grapple, irrespective of which party is in power after the Federal Election.

What are the price rises that you fear the most? Are you prepared for the predicted cost-of-living increases?

Written by Matt Grudnoff

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