Your back pocket is going to be a whole lot emptier as grocery prices skyrocket. Picture: Supplied
Your back pocket is going to be a whole lot emptier as grocery prices skyrocket. Picture: Supplied

Graph shows how high your bills will go

WE RECEIVED another batch of evidence on Wednesday of a weak economy, with confirmation that inflation is still too low, just 1.7 per cent over the last year. But buried in the data is a potential time bomb: rising grocery prices.

The Reserve Bank (RBA) now has another reason to cut interest rates. Commonwealth Bank analysts expect that rate cut to come in February, taking our interest rate to a new record low of 0.5 per cent. But according to market pricing, there is still a chance the RBA could fast-track it and slash rates before Christmas in one last-ditch effort to get this nation spending.

WHY DO WE WANT HIGHER INFLATION?

As we know, inflation is like the heat the economy throws off when it's growing well. Companies raise prices when they get a lot of demand and raise wages when they are struggling to hire enough people. Higher prices and higher wages create the inflation cycle.

At the moment the economy is lukewarm because of low growth. We see little in the way of wage rises, little in the way of demand, and not enough growth.

The RBA's job is to stimulate the economy until there's a bit of heat - but not too much. It is supposed to keep inflation between 2 per cent and 3 per cent on average. It has been failing at that recently. Inflation has been below 2 per cent for four whole years.

WHAT'S INFLATION REALLY?

The official inflation figure makes some people scoff. They don't believe inflation can be so low. The reason for the scepticism is the prices we keep at the top of our mind are usually the one that are going up - especially prices of items where there is no substitute.

Petrol is the classic one. Most Aussie households only spend a few per cent of the weekly budget on fuel, but when it goes up 10 cents a litre we all hate it.

Electricity bills are another example. The ratio of anger to actual cost increase is high, partly because we feel powerless about it.

But consumer price inflation (CPI) covers lots of things, not just things we buy often. Cars, travel, recreation, and electronics. Things where the prices have fallen recently, like clothing.

The clothing inflation index, for example, is still where it was in 1990 because prices of clothes have been stable for years. You can buy a shirt with less than an hour's wages now instead of a day's wages. That's why CPI can be so low while it feels like prices are rising.

What matters for politics is "perceived inflation". You can have big inflation in some things - cigarettes, travel, cars, furniture - and people don't notice too much. But other categories cause a ruckus.

That's why I got worried when I saw this next graph. After a long time of Aldi holding down grocery prices in this country, they're shooting back up.

GROCERY BILLS

As the next graph shows, prices are rising in the supermarket aisles.

Grocery prices are now skyrocketing in all major categories. Picture: Supplied
Grocery prices are now skyrocketing in all major categories. Picture: Supplied

Partly this is due to the drought. Not much is growing out there and that means there's less fresh food to buy, causing prices to rise. It is also partly due to a lower Aussie dollar, which is causing higher prices on imported goods.

But supermarkets are also partly responsible for the higher prices on things like bread and milk due to a change in the way competition is happening in the market. According to an analyst from investment bank UBS, "pricing is improving and range is not being cut as retailers focus on winning via differentiation".

That means supermarkets are trying to win customers by things like Ooshies and Discovery Gardens rather than by another round of "Down, Down" and $1 milk. Even Aldi has renovated a bunch of its stores as it transitions to more of a mid-market image instead of being a pure discounter. They're tired of only competing on price.

But it doesn't really matter what is causing higher grocery prices at the checkout. What matters is its impact on perceived inflation. It is highly unlikely Australians will fail to notice their grocery bill going up. And that could cause a whole new round of palaver.

We are potentially on the brink of a paradoxical period where the RBA is still trying to heave inflation back up over 2 per cent - the bottom boundary of its target range - while people are absolutely furious about the skyrocketing cost of living. That, I'm sure, will be absolutely fine, and no politicians will exploit it for political gain, right?

Food inflation is higher than CPI. Picture: Supplied
Food inflation is higher than CPI. Picture: Supplied

We've been lucky in some ways recently. Our most recent period of weak wages growth coincided with falling grocery prices, a big fall in petrol prices (down to $1.20/litre in March this year) and a brief fall in house prices. Now houses, petrol and food are all rising.

Around the world, from France to Chile, riots break out over price hikes. I don't expect riots in Australia, but I do expect a period where the only political issue any politician will dare talk about is the cost of living.

Jason Murphy is an economist @jasemurphy. He is the author of the new book Incentivology.


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