The latest inflation figures showing a 5.1% increase in prices over the past 12 months mean three things: the budget figures are already wrong, an interest rate rise next week is very likely, and last, workers have seen their real wages absolutely smashed.
It is not unusual for budget figures to be wrong, but to be wrong after just one month takes some doing.
Four weeks ago, the budget predicted that inflation growth in the 12 months to June this year would be 4.25%, and yet the figures released on Wednesday by the Bureau of Statistics found that in the 12 months to March inflation had already grown by 5.1%:
That was the fastest since the GST, and outside that abnormal period, the fastest since 1995.
For the 4.25% budget prediction to come true, prices in the June quarter (which we are in) would have to stay absolutely flat.
That – barring a massive collapse in oil prices or the housing market – is almost certainly not going to happen.
And so, we have a budget wrong, just four weeks after it was issued.
Hardly the type of thing that brings the phrase “strong economic management” to mind.
More importantly, however, a 5.1% increase – which was above expectations – means that the Reserve Bank is now more likely than not to increase the cash rate next week:
I have always considered it unlikely that the RBA would increase rates in May because I assumed it would wait to see the latest wage price index figures that come out three days before the election on 18 May.
But I suspect these inflation figures mean the RBA cannot wait.
The reason is what is driving the high inflation.
The first is obviously petrol prices.
The big spike in prices in March off the back of Russia’s invasion of Ukraine saw an 11% jump in automotive fuel prices in the three months to December alone:
That means fuel prices are now 22% above what they were before the pandemic and 61% above what they were in the middle of 2020 when we were all in lockdown (and thus not driving).
Now the Reserve Bank can’t do anything about petrol prices, because like other items known as “tradables”, petrol prices are largely set on the world market.
But what is noticeable in the latest figures is that non-tradable items (such as rents, house prices, childcare, hairdressing, education, gas and electricity) rose 1.8% in the March quarter and 4.2% in the past year.
Over the past 20 years, the Reserve Bank has only increased the cash rate in periods when non-tradable prices have risen by more than 3% (except for once after the GFC).
A growth of 4.2% is firmly above that level:
And that, more than anything, means a rate rise next week is likelier than it was before these figures come out.
A rate rise is of course going to hurt homeowners and will probably flow through to those renting.
It also means pain for workers, who are now watching inflation grow more than twice as fast as wages:
It also means that real wages in the 12 months to March this year will have almost certainly fallen by more than 2%.
In the 12 months to December, wages rose 2.3%. Even if we bump that up to 2.5% for the March quarter, the fall in real wages would be so great they would be back to 2014 levels:
That truly destroys any sense that there has been some glorious recovery out of the pandemic. Yes, GDP has increased, and yes unemployment has fallen, but much of that can be put down to the massive stimulus for the government and the cash rate being lowered to 0.1% and the abnormality of zero migration.
But what has actually happened to people’s standard of living? A plunge.
That story is actually even worse than these figures suggest, because the items that have had the biggest prices rises are the things you can’t avoid paying – fuel, gas, education, meat, fruit and vegetables, coffee, preschool.
In the past year the price of non-discretionary items has risen much faster than average inflation:
Because low-income households spend more of their income on these non-discretionary items it means the fall in their real wages has been much greater – well over 3%.
And so with these latest inflation figures, the government is going to an election where workers’ ability to buy things with their wages is on average little different from what it was when Tony Abbott took office in September 2013.
That is not a sign of success.