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Is low Aussie inflation a bonus or a burden?

Since the Coalition government was elected in September 2013, the rate of inflation has been very low. This is generally favourable news at it keeps cost of living pressures in check and means that even with modest wages growth and low interest rates, many householders are able to maintain their purchasing power.
It is important to note that this low inflation climate in Australia has been driven by well contained global inflation pressures and the disinflationary effects of a weak domestic economy.

The low overall inflation rate masks some huge divergences in price pressures between different goods and services.

In the three years of Coalition government, prices have fallen in some significant categories of household spending, most notably petrol (down 23.1 per cent), computers and other electronic equipment (down around 10 to 15 per cent), cars (down 1.7 per cent) and clothing (down 4.3 per cent). These price falls have largely been the result of global issues, especially the drop in oil prices, and the on-going high productivity / low cost production of goods in many merging market countries. Advances in technology have also worked to drive many prices lower.

That is the good news.

In many of the areas of the economy where householders are particularly sensitive to price increases and where the government has a significant impact on costs, there have been some huge price rises. By way of background, in the last three years, the total increase in average wages has been around 7.5 per cent.

It has not been a good time, financially, in the last three years to have been a parent under the Coalition government with childcare costs having risen a stunning 26.6 per cent in just three years. What’s more, over the same time the cost of pre-school and primary education has surged 17.5 per cent, secondary education costs are up 16.2 per cent while tertiary education costs have jumped 12.3 per cent.

At the same time, the cost of medical, dental and hospital services has surged 17.8 per cent. It is also noteworthy that property rates and charges have risen 15.7 per cent and reflecting the bipartisan policy of increase the excise on cigarettes, tobacco prices have surged 44.0 per cent.

The above examples help to show how there are significant segments of the community who are not enjoying the broader benefits of low inflation. Those householders with children in childcare and school, with a higher than average use of health and dental services and who own a property and pay council property rates, are likely to be experiencing genuine cost of living pressures.

Healthy people with no dependent children are likely to be enjoying the benefits of weak or falling prices for the bulk of the goods and services they consume.

There are always significant divergences in price pressures for different goods and services. Since the Coalition government took office, these differences have been large with many of the items where government policies have an influence (childcare, education and health), there have been outsized increases. This may account for part of the general disillusionment with the government even though the overall inflation rate and cost of living pressures appeared to be relatively favourable.