Does anyone remember when we worried about rising inflation? | Greg Jericho

In the run up to the May budget, Australia’s economy continues to show little sign of retuning to normal levels of inflation growth. Demand throughout the nation – and especially in the west – keep prices growth low. And whereas as once a boom in tax revenue was a sign of a need to put a lid on inflation, now the treasurer might be thinking of using it to speed things up.

The March inflation figures, which were released the day before Anzac Day, might well have caused some to lapse into a moment of remembrance – such as, does anyone remember when rising inflation was a concern?

The ABS estimates that across Australia, the consumer price index and the RBA’s trimmed mean measure of underlying inflation grew by just 1.9% of the past year:

Annual inflation growth

Chart: Greg Jericho Source: ABS 6401.0, Tablr 8, derived Get the data Created with Datawrapper

Given the RBA’s target range of annual inflation is between 2% and 3% this continues the now more than two-year run of underlying inflation being below that target range.

The quarterly figures show little sign of any shift up either. In the March quarter, CPI grew by 0.4% (annualising out at a mere 2.6%), and while underlying inflation grew by 0.5%, which is at the lower end of the RBA’s target, the low quarterly growth last year in September and December suggest the annual growth figure should remain low for another three to six months at least:

Quarterly inflation growth

Shaded area = RBA target band

Chart: Greg Jericho Source: ABS 6401.0, Table 8, derived Get the data Created with Datawrapper

The reality is that no one is expecting prices to take off.

The big driver of prices is demand – the demand for primary products to make things, and the demand to consume the products that have been made. And we haven’t had much demand since the global financial crisis:

Final demand – annual growth

Chart: Greg Jericho Source: ABS 6472.0, Table 1 Get the data Created with Datawrapper

Since the economy exited the GFC in 2010, annual demand in Australia has grown by just 1.7% on average – compared to 3.7% during the mining boom.

This is why you can expect to see the government in next month’s budget try to get things going.

As I noted earlier this month, the budget looks set to get a nice revenue boost via company taxes. Such boosts (though much larger) occurred during the pre-GFC mining boom years. But they occurred while companies where investing in massive numbers, and hiring workers – so the tax revenue increases reflected an overall speeding up of the economy.

It meant Peter Costello really needed to try to keep a lid on things by running larger surpluses. That inflation growth kept rising and actually reached 5% is a good sign the budget surpluses were actually too small.

By contrast, the company tax boost that Scott Morrison looks set to receive is not reflective of increased investment and employment, but rather come via exports – and thus rather than being a sign of the need to keep a lid on things, it’s more the case that the increased revenue can be used to increase demand, either through infrastructure, other government spending or tax cuts.

The problem, as ever, is that the nation’s economy has an annoying way of not being uniform.

In Sydney, inflation grew by 2.1%, but in Perth, prices rose by just 0.9%:

Annual inflation growth – Sydney & Perth

Chart: Greg Jericho Source: ABS 6401.0, Table 5,derived Get the data Created with Datawrapper

The good news is that across all cities, inflation growth has picked up over the past year:

Annual inflation growth – capital cities

Sydney

Created with Raphaël 2.1.2

2.0

4.0%

Jun 03

Dec 03

Jun 04

Dec 04

Jun 05

Dec 05

Jun 06

Dec 06

Jun 07

Dec 07

Jun 08

Dec 08

Jun 09

Dec 09

Jun 10

Dec 10

Jun 11

Dec 11

Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

Dec 14

Jun 15

Dec 15

Jun 16

Dec 16

Jun 17

Dec 17

Chart: Greg Jericho Source: ABS 6401.0, Table 5, derived Get the data Created with Datawrapper

But even in Melbourne and Sydney, where employment growth has been strongest, inflation growth remains at historically low levels.

A big driver of the difference across the nation is food and housing costs, and to a lesser extent education and health (both of which are growing faster than overall inflation):

Capital city annual inflation growth – major expenditure groups

Food & non-alc bevHousingHealthEducation

Created with Raphaël 2.1.2

-0.6%

Canberra

2.0

4.0%

0.9%

Melbourne

0.6%

Canberra

0.6%

Sydney

0.5%

Brisbane

0.0%

Adelaide

-0.1%

Darwin

-0.2%

Hobart

-0.6%

Perth

Chart: Greg Jericho Source: ABS 6401.0, Table 5, derived Get the data Created with Datawrapper

The difference in housing costs are reflected best with the changes in rental prices.

Rent prices are a good indicator of economic activity because if an area’s economy is doing well, people will move there for the work and thus increase the demand for housing.

This certainly happened in Perth during the mining boom – where rent prices rose by nearly 14% in 2008. But the end of the mining boom has seen an exodus of workers such that rents are now on average 6.3% cheaper in Perth than they were a year ago.

By contrast, in Sydney and Melbourne, rent prices have been growing faster than they have for some time – but even here the growth rates in both cities remains well below previous heights:

Rents – annual price growth by capital city

Sydney

Created with Raphaël 2.1.2

-5.0

5.0

10.0%

Mar 08

Sep 08

Mar 09

Sep 09

Mar 10

Sep 10

Mar 11

Sep 11

Mar 12

Sep 12

Mar 13

Sep 13

Mar 14

Sep 14

Mar 15

Sep 15

Mar 16

Sep 16

Mar 17

Sep 17

Mar 18

Chart: Greg Jericho Source: ABS 6401.0, Table 5, derived Get the data Created with Datawrapper

But the biggest driver of housing costs at the moment is electricity and gas. Adelaide, Sydney, Melbourne and Canberra – all of which have an overall inflation rate higher than the national average – have experienced faster growth of electricity and gas prices than the rest of the nation:

Housing costs – annual price growth by capital city

RentsProperty ratesWater & sewerageElectricityGas etc

Created with Raphaël 2.1.2

-6.3%

Canberra

10.0%

3.7%

Hobart

2.6%

Canberra

2.4%

Sydney

2.2%

Melbourne

0.5%

Adelaide

-0.5%

Brisbane

-6.0%

Darwin

-6.3%

Perth

Chart: Greg Jericho Source: ABS 6401.0, Table 9, derived Get the data Created with Datawrapper

But while Adelaide has had the largest electricity price increase in the past year, and prices in Brisbane have actually fallen on average, over the past five years Brisbane actually has seen the highest electricity price growth by some way.

Over the past decade, Sydney and Melbourne are top, with Adelaide behind Brisbane, and only marginally ahead of Perth:

Electricity price growth by capital city

Past yearPast 5 yrsPast 10 yrs

Created with Raphaël 2.1.2

-1.4%

Canberra

5.0

10.0

15.0%

17.5%

Adelaide

16.7%

Melbourne

13.8%

Sydney

10.6%

Canberra

9.7%

Perth

0.9%

Hobart

0.5%

Darwin

-1.4%

Brisbane

Chart: Greg Jericho Source: ASB 6401.0, Table 5, derived Get the data Created with Datawrapper

Ahead of next month’s budget there will invariably be talk of cost of living pressures, and certainly the increase in rents, electricity and gas, as well as health and education costs mean this remains an issue.

But the reality is the treasurer would be very much hoping for an end to this run of inflation growth below the RBA’s target band.

With low inflation growth the impetus for wages growth to improve remains weak. And unlike in the past, where a boom of tax revenue meant the need to keep a lid on economic growth and inflation, next month expect to see the treasurer do all he can to get growth back to normal levels.

Greg Jericho is a Guardian Australia columnist