Why You Can’t Trust Inflation Figures
The curious case of mismatched experiences of inflation against the official figures has been something interesting for some time. Here’s an article that attempts to explain the gap.
The secret lies in the “basket” of goods and services the Bureau of Statistics uses to measure the consumer price index (CPI) each quarter.
About 40 per cent of the “basket” consists of tradables, goods that have prices determined on the world markets, such as clothing and electronics. The bureau deems goods as tradable if more than 10 per cent is exported or imported.
The other items are non-tradables – goods and services that have to be consumed where they are bought, such as rent, utilities, insurance and education.
“When you look at the path of tradables and non-tradables, what you see is the domestically generated prices in services have been growing much more strongly in the past five years than tradables prices,” JPMorgan economist Ben Jarman said.
One the one hand, non-tradable inflation – also known as domestic inflation – has remained over 3 per cent for the most of the past decade, while tradables have experienced deflation brought about by the strong Australian dollar, Commonwealth Bank chief economist Michael Blythe said about the “two-speed divide” in an economic note.
It’s been an interesting few years since the GFC. Australia has somehow managed to claw on to the asset price gains before the GFC in property, and regained much of the value in share markets. Unemployment hasn’t exactly exploded, but our productivity has caved in (more on that later). The problem of the mismatch then seems to come from the fact that our property bubble largely remains unpopped, and that we’re slowly grinding our way down so that the property values fall back in line with historic norms. This is possibly why the RBA remains steadfast in keeping rates higher. They’re looking to slow the rush to property as much as possible while the market readjusts.
Which leads me to this article here about the rising costs in Australia.
In the past 11 years Australia has become one of the most expensive places to live, costlier than New York, London, Frankfurt and Singapore on everything from five-star hotels, car rentals, public transport, a pint of beer, cigarettes, jeans and an iPhone.
The survey, compiled by Deutsche Bank on prices and price indices on a range of products collected largely from the internet, concludes the US is the cheapest developed country in the world and Australia and Japan two of the more expensive.
According to the survey, Sydney remains the most expensive place for a weekend away, almost double the cost of a weekend holiday in New York. To put it into perspective, New Zealand weekend getaways are 25 per cent cheaper than in New York.
Singapore-based Deutsche Bank global strategist Sanjeev Sanyal said the survey is a survey of prices and deliberately does not try to explain the data. It is more a case that the price comparisons speak for themselves and in Australia’s case it is massively more expensive on most goods and services. Like all surveys that compare prices, there will be some distortions but even if these are stripped out, a basic trend has been captured that is disturbing in a global context.
Australia is part of a global community operating in a competitive world. When prices are relatively higher than the rest of the world it raises questions about how we can compete and how do we become less expensive?
This is peculiar and interesting because if the first article tells us that inflation figures are somewhat distorted by the basket of goods used to measure the inflation, then the second article points out that it’s been going on for a long time – so much so that our situation is untenable.
The funny thing about markets is that if there’s a greater fool to pay the price for something, then there’s a market for that price. When you think about it, this greater fool philosophy has driven such things as Westfield rent price rises to Sydney property markets to prices of vintage cars and guitars and whatever else you can slap a price tag upon.
What we have in Australia and its pricing is the boiled frog effect where the gouge has been going on gradually for some time with little competition, to correct for the gouge, and now everybody is over-invested in the gouge growing because we think that’s economic growth. Except the problem is we’ve run out of greater fools to on-sell our gouge-prices and we’re wondering why we’re so damn expensive. We’ve been telling ourselves that the RBA has got inflation under control for some time, but clearly that’s been happening that way because the RBA is incentivised to under-report inflation so that they can look better. Then they complain about falling productivity.
More Taxes, Less Fun
Here’s the complimentary third piece of the day that’s worth a read and a think.
First, tax revenue has collapsed, and Treasury secretary Martin Parkinson warns that, on current settings, it will stay weak for years ahead. The high dollar has flattened profits or driven them down in much of the economy. Mining companies are making big profits, but they use depreciation deductions to write off their $284 billion of investment over the past decade against taxable income.
Second, Labor has introduced three big new fiscal commitments without the revenue to pay for them. The mining tax was meant to fund the government’s share of the increase in superannuation contributions from 9 per cent to 12 per cent, but that is now essentially unfunded. So is the commitment to $9.4 billion of new education spending from the Gonski report and so is the national disability insurance scheme.
Third, the pressures of an ageing society on the budget, which Treasury has warned of for years, are becoming real. The Howard government only intensified this with new entitlements for older Australians, and Labor has done too little to right the balance.
None of that is terribly ‘new’ news. It kind of suggests that Australia is one country that could afford to tax a bit more and work a little harder (“yes you, laddie!”). Sounds a bit like ‘austerity’ to me and of course we know austerity has lost credibility in the last few years. I would say that just because the argument for austerity in countries like Portugal, Ireland, Greece, Spain Cyprus and so on has turned out to be a crock, doesn’t mean it’s uncalled-for; it is possible that a little bit of austerity might do us a bit of good seeing that we haven’t done much in that way since the GFC came to roost.
Look, I don’t really have a great nugget of thought about gold prices crashing. Marcus Padley on the other hand has a good column here. There’s this really crucial bit I want to share with you all.
If you consider all the gold ever dug up forms an essentially static 20.4-metre by 20.4-metre by 20.4-metre cube, a cube that doesn’t change much in size, then you begin to realise all the price really reflects is what a herd of hot potato passers are prepared to pay today.
Meanwhile the cube just sits there not doing anything, returning nothing, while the herd goes stampeding around and on occasion having a ”freak out” as it did this week. It must wonder what all the fuss is about because even it, a large lump of brainless inert metal, knows nothing is really changing at all, except the fear, greed and delusion that controls the price.
So there isn’t much value you can add doing fundamental analysis on the gold price and a lot of the highbrow discussion is redundant because making money out of the current gold price collapse is going to be a function of technical rather than fundamental skills, in which case 90 per cent of you can simply ignore it.
The man is right on.