Table of Contents
For the last few decades, you could always rely on the fact that prices for clothes and electronics barely lifted. The price of a laptop computer or a pair of jeans is roughly the same as it was last millennium.
Just look at these ads from almost 30 years ago. The price tags would not surprise you if you saw them today:
Source: Trove
In 1993, a computer cost $1500 to 2000. You can find a mid-market computer at a similar price now and it will do far, far more.
The Consumer Price Index emphasises just how much more value we are getting for our money these days. It shows that in quality-adjusted terms, the price of some core items has been falling steadily. The bars in the below chart show the change in the CPI compared to the year earlier, and it illustrates three categories that have seen basically no rises in price: women’s clothes, computers and homewares.
Homewares is an interesting one. When those ads above were printed, people kept the good crockery in a special walnut display case. But most households formed in the last 20 years wouldn’t have “good crockery” they didn’t use.
So we’ve had falling prices, as the above chart shows. But hold on a second. Zoom in on that last bit of the chart. Enhance. Wow. What that tells us is important. Prices for these categories are no longer behaving as they have behaved for the last two decades. Price falls are over. Instead, they are rising.
Even these categories—where Moore’s Law and the rise of Chinese manufacturing have been insulating us from higher prices—haven’t been able to resist a rising tide of inflation.
That sends a message. Inflation is spreading out. There used to be a mix of things rising and falling, but now it’s almost all just rising. Goods and services, imported and domestic. High prices for fuel, rent, labour and shipping mean almost no category is immune from higher prices in 2022. (Child care is the main exception and price falls in that space have nothing to do with the market and everything to do with subsidies).
In Comes the RBA
Official rates have risen enormously in Australia so far this year: from 0.1 per cent to 2.85%. But inflation-adjusted official interest rates are still negative, meaning you could borrow now for a year and pay back the loan with money that is worth less.
At the next meeting, in early December a further hike to over 3% is considered a high probability, according to market pricing, although the RBA pausing is not out of the question.
A December hike was considered an even higher probability a few weeks ago, before the latest US inflation figures, which surprised the market by showing inflation softening from 8.2% annual to 7.7% But beware. That figure is dragged down by lower used car prices. Australia’s CPI doesn’t include second-hand goods.
What’s more, our economic cycle is running on a bit of a lag compared to the Americans. Inflation rose later and the central bank reacted later. It’s a bit like the way movie releases used to work— America sees the show now; we get it in six months’ time.
There’s no guarantee of falling CPI in Australia any time soo—indeed Treasury and the RBA still believe we are in the upswing and price growth is yet to peak.
December Rate Rise
Stocks rose excitedly on the falling US inflation number because rate hikes are bad for asset prices. But As the US Fed’s Chris Waller said when he spoke in Sydney this week, “The market seems to have gotten way out in front on this, over this one CPI report.”
Noise afflicts all economic data and a surprise result like that can be statistical artefact, not a truth on the ground.
With the RBA Board not set to meet in January, the chance they pass up the opportunity for a December rate cut looks slight, unless of course unemployment leaps higher. If they do hike, and if the language used to describe their inflation-fighting disposition is aggressive, expect stocks and the housing market to soften in response.
House prices show the opposite pattern to garments and computers. They’ve risen enormously in price over the last 30 years, but price growth is suddenly very negative. You can certainly make the case that households invested any savings they made on consumer goods into bidding up the housing markets. And now that process is in reverse.
