Source : THE AGE NEWS
Talk about the dog that didn’t bark. Cast your mind back to the distant days of the election campaign, and you’ll dimly remember how often we were told how polling revealed that the only subject hard-pressed voters were interested in discussing was the cost of living.
Treasurer Jim Chalmers stuck to this rule relentlessly, repeatedly assuring us the economy had “turned the corner” (a focus-group-tested line if ever there was one), but Peter Dutton had trouble keeping to the script.
Illustration by Simon LetchCredit:
He was supposed to keep asking whether we felt better off than we did three years ago and, knowing our answer would be “no”, put all the blame for this regression onto Labor. But he couldn’t resist reminding us of the supposed rising tide of crime and risk of invasion.
Am I the only person to have noticed that, in all the many thousands of words commentators have spilled in explaining Labor’s landslide win, there’s been nary a mention of the cost of living? Had it been the only issue in voters’ minds, surely there’d have been a swing away from Labor, not towards it?
And what about all those outer-suburban seats full of families with massive mortgages? Why didn’t any of them think it was time to give the other side a try?
I think the explanation for the big swing to Labor was far simpler than the pundits think. People’s worries about the cost of living were forgotten after the arrival of a new and far more pertinent issue: voters got their first good look at Dutton and the kind of politician he was and, overwhelmingly, said “No thanks”. Come back Albo, all is forgiven.
Voters got the chance to have a close look at Peter Dutton during the campaign. They weren’t impressed.Credit: James Brickwood
So, what happened to the cost of living? Were the pollsters deluded in believing voters wanted to think about little else? Why were voters’ minds so easily diverted to another issue? Where are we at with the cost of living? Is it done and dusted, have we really turned the corner, and what are the prospects?
When people complain about the cost of living, they’re really saying they find it a struggle to balance the family budget from fortnight to fortnight. The trick is that, while in recent years they’ve been finding it particularly difficult, even in normal times it’s a fairly common occurrence.
So, complaining about the cost of living is like complaining about the weather – an ingrained habit. In summer, it’s always too hot; in winter it’s 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 living’s a worry. It’s always up near the top of the list. When household budgets are particularly tight, it’s always at the top.
But introduce some more novel cause for concern, and the cost of living is quickly supplanted.
The thing about of the cost of living, however, is that it’s like an ailment. It’s the symptoms you complain about, not necessarily the root cause of those aches and pains.
When you ask people why they’re 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.
It’s true. Overall, supermarket (and other) prices are always rising. But what matters is the rate at which prices are rising – 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, that’s 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 – that is, back within the desired range. By March this year, it had slowed to 2.4 per cent. The more demanding “underlying” 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 it’s 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 – and, in some cases, actual falls – in overseas prices that are beyond our control.
But where home-grown prices are concerned, the main reason they’ve 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.
The Reserve made its first increase in the official interest rate just a few days before the May 2022 election – 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? It’s not the pain of rapidly rising prices that’s caused people to keep complaining about living costs, it’s 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, it’s 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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