So, complaining about the cost of living is like complaining about the weather โ an ingrained habit. In summer, itโs always too hot; in winter, itโs always too cold. Complaining about the cost of living is our default setting.
Introduce some more novel cause for concern, and the cost of living is quickly supplanted.
If nothing too bad is happening, pollsters asking about the big problems the politicians should be dealing with will always be told the cost of livingโs a worry. Itโs always up near the top of the list. When household budgets are particularly tight, itโs always at the top.
But introduce some more novel causes for concern, and the cost of living is quickly supplanted.
The thing about the cost of living, however, is that itโs like an ailment. Itโs the symptoms you complain about, not necessarily the root cause of those aches and pains.
When you ask people why theyโre complaining about the cost of living, they usually reply that the rise in prices is shocking. How do they know? They see it at the supermarket every week.
Itโs true. Overall, supermarket (and other) prices are always rising. But what matters is the rate at which prices are rising โ that is, the rate of inflation. For about the past 30 years, governments, their econocrats (including the Reserve Bank) and economists generally have accepted that if the rate of inflation is averaging between 2 and 3 per cent a year, thatโs nothing to worry about.
When Labor came to power in May 2022, the annual inflation rate, as measured by the consumer price index, was 5.1 per cent. By the end of that year, it reached a peak of 7.8 per cent.
The rate has slowed continually since then. By the end of September last year, it had slowed to 2.8 per cent โ that is, back within the desired range. By March this year, it had slowed to 2.4 per cent. The more demanding โunderlyingโ or core measure of inflation has slowed to 2.9 per cent.
So yes, in that sense, we have turned the corner, as Chalmers keeps telling us. But itโs not that simple. You have to ask why the rate of increase in consumer prices has slowed so much. A fair bit of it is the slowing โ and, in some cases, actual falls โ in overseas prices that are beyond our control.
But where home-grown prices are concerned, the main reason theyโve been rising more slowly is that the Reserve Bank has been raising interest rates to put the squeeze on households with mortgages, reducing their ability to keep spending so much on other goods and services, and so reducing the upward pressure on prices.
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The Reserve made its first increase in the official interest rate just a few days before the May 2022 election โ a clear signal to voters that the inflation problem got going under the previous, Coalition government.
After the election, the Reserve raised interest rates a further 12 times, increasing the official rate by a total of 4.25 percentage points to a peak of 4.35 per cent in November 2023.
See what happened? Itโs not the pain of rapidly rising prices thatโs caused people to keep complaining about living costs, itโs the pain from the high mortgage interest rates the Reserve has been using to get prices rising more slowly.
But in February this year, the Reserve cut interest rates by one click, of 0.25 percentage points. This was a sign it regarded the job of getting the inflation rate down as almost done. It was also a pre-election signal that rates would be falling further in the next term of government.
Indeed, itโs likely to cut rates by another 0.25 per cent click next week, with a further two or three clicks to come after that, greatly reducing the cost-of-living pain for households with mortgages.
Time for us to move on to other economic worries.
Ross Gittins is the economics editor.
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