Economics
Inflation – a promising story based on rough numbers
The story in the media following Wednesday’s publication of the Monthly Consumer Price Index Indicator is that inflation is 2.5 percent – bang in the middle of the Reserve Bank’s target two to three percent band.
Some journalists who scroll down below the opening screen report on the slightly higher trimmed mean figure of 2.8 percent, but that’s still within the RBA’s target band. The ABC includes in its report a photograph of RBA Governor Michele Bullock with an expression of the satisfaction of achievement on her face, and a photograph of Treasurer Chalmers trying not to smile.
These figures are based on movements in the index between January 2024 and January 2025, a period in which the index has been trending down. Because they are 12-month lagging indicators they understate the extent that price inflation if falling.
In fact the index suggests that prices were lower in January than in December: the index fell from 125.2 to 124.9. That’s deflation at an annual rate of 3 percent. But there’s a fair bit of sampling error in month-to-month movements.
In these roundups I have been using a three-month moving average of the index to filter out some of the sampling error, while getting a reasonably recent estimate of movements in the index – a compromise between recency and accuracy. That is shown in the graph below – a regular update in these roundups.
Does this uptick in the three-month estimate mean inflation is actually making a comeback? Probably not.
The big mover in the latest three months has been food, rising at an annual rate of 4.3 percent. That’s probably a real rise, but food prices are volatile. Another strong driver of the index is a strange movement in energy prices, suggesting that electricity prices have risen at an annualized rate of 197 percent. As the ABS explains, this is an artefact resulting from the timing of rebates. The pre-rebate electricity price has been flat since July 2023. This would be consistent with the cost of generating electricity falling while the cost of transmitting and distributing electricity is rising. In other words the government’s renewable energy policy is working to bring down the cost of electricity.
For some of the same reasons that the indicator over the last three months has been bumped up by artefacts of measurement, the February indicator, to be published on March 26, could show a fall. The RBA Board will announce its decision on interest rates a few days later, on April 1 – April Fool’s Day. Once it deals with the noise in the figures, it is likely to find that CPI inflation is falling faster than it has previously estimated. In fact the grey line on the graph (a third-order polynomial regression) suggests that CPI inflation is now well below the RBA’s target band of two to three percent.
We can get carried away with our search for precision in the CPI. On the Radio National program It’s the economy stupid Peter Martin discusses with Aruna Sathanapally of The Grattan Institute and Michael West the meaning of CPI measures. The session includes some basic description of how it is constructed and the way it is periodically re-based to reflect changes in consumption patterns. The main message is that it would be a mistake to believe it is a single and accurate measure of something we call “inflation”. It is constructed in accordance with established practices: it is not subject to political manipulation. But as a precise number its main application is when it is used as an indexation term in commercial contracts and in wage agreements. Otherwise we should be not imbue it with spurious accuracy.
Perhaps its apparent accuracy also has a role in the political domain, because that 2.5 percent is right where the government would like it be.
Politically it’s the story that counts, and that story is that the government has licked the inflation it inherited from the Coalition.
Population and immigration weaponized
As we have seen in the German election, and not long ago in the Dutch election, immigration is a hot political issue. In part this is because populists on the right have been able to awaken dormant racist attitudes, particularly with the idea of “replacement” – the idea that people with a different skin colour or a different religious belief are replacing the native population. In part opposition to immigration stems from a belief that immigrants make disproportionate demands on social security systems. In part it is because people believe that immigrants are responsible for high demands on other public and private services – everything from housing prices, waiting lists for health services, through to road congestion. And there is the perennial idea that immigrants take jobs from natives.
From another pulpit are the “populate or perish” voices. Some voices urge governments to reward and encourage reproduction among the native population, while others defend and promote a strong flow of immigrants. Business people like population growth, because it ensures a steadily increasing market, and there are still those who believe that we have a vast empty land that others will fill if we don’t fill it ourselves and raise a big army to defend it.
Lots of noise, mostly from the poorly-informed, from both pulpits.
For a long time former Immigration Department Deputy Secretary Abul Rizvi has been writing in Pearls and Irritations and in other media about immigration, correcting misinformation and clarifying the distinction between net immigration (over which governments have little control) and the numbers in governments’ migration quotas (over which they have full control). If you have an hour and forty minutes to spare you can watch and listen to him on Joe Walker’s podcast on immigration, part of his policy series, explaining how immigration policy has developed and how it has shaped our society. (Mercifully Walker provides a transcript.) Rizvi is author of the 2021 book Population shock, covering population issues in Australia and worldwide.
With a message broadly similar to Rizvi’s, but with less detail, Liz Allen of the ANU has a Conversation contribution Population panic: how demography is used for political gain.
These aren’t just theoretical discussions. Dutton is already weaponizing immigration, for example while ostentatiously wearing a kippah before a gathering, he stated that Albanese is fast-tracking immigrants from Gaza so that they can vote for the Labor Party in the coming election. Absurd on several counts, but credible, perhaps, among the readers of right-wing extremist media.
The ultimate weaponization of immigration is in Trump’s America. On Late Night Live you can hear Bishop Mark Seitz, of El Paso, whose diocese covers the Rio Grande, explaining how Trump’s policies have terrorized immigrants. In line with Pope Francis’s teaching and the moral theology of the New Testament, he has stood with other Christian leaders speaking out against Trump’s treatment of refugees and asylum-seekers.
A strong message from both Rizvi and Allen is that governments are nervous about stating a population policy, because any such policy has to include an explicit policy about immigration, which would lead to a scare campaign. Dutton has already started one.
Dutton has another simple answer to a complex problem – break up the insurers
Insurance premiums have been rising faster than the CPI for a long time – certainly in the 35 years since the ABS has been separately reporting on insurance in the CPI. Note, in the graph below, the sharp rise since 2022. The real price of insurance has almost trebled in the last 35 years, making it unaffordable for many households, particularly those in high-risk areas.
Ever the populist with simple solutions to complex problems, Dutton at first said the insurance companies should be forced to divest – a policy so dumb that even the National party thought it was a bad idea. He has since vowed to “deal with” insurers should the Coalition win government.
The insurance industry, unsurprisingly, didn’t embrace the idea of diversification. Andrew Hall of the Insurance Council of Australia, defends the industry’s high premiums. In Australia we’ve been building houses on floodplains, and because insurers cover themselves in the global reinsurance market, we’re bearing some of the costs of natural disasters in other countries, such as the California fires: Carving up insurers isn't a 'silver bullet' for problem of rising premiums, industry says by Maani Truu on the ABC website. The Insurance Council also makes the sensible call for a $30 billion taxpayer-paid flood defence fund. Jess Davis’s article Insurance industry calls for $30b flood defence fund as fees cripple households on the ABC website goes into details about the regions most at risk, and the problems faced by people seeking to re-build after a flood or other natural catastrophe.
In response to the Coalition’s idea about divestment, Allan Fels, now of the University of Melbourne, wrote a Conversation article: What is divestiture and how would it stop insurance companies ‘ripping off’ customers?. Fels is enthusiastic about strengthening our competition laws to make more use of divestiture powers, but his article stops short of endorsing the Coalition’s proposal.
The Australia Institute has made what should be the obvious point: the best way to keep insurance costs down is to keep fossil fuel emissions down. Greg Jericho goes further in a 6-minute video: Dutton's insurance threat misses the elephant in the room. The elephant is climate change. There is also industry concentration: as with the big banks the industry is concentrated among four companies, and they have been enjoying high profits in recent times. But Jericho does not favour divestiture as a solution to high prices, because smaller firms find it harder to spread their risk, and they find it difficult to get good deals on reinsurance.
As with other matters of economic policy, the Coalition is clueless. But no government in recent times has addressed fundamental structural failures in the insurance industry.
It does a reasonably good job at covering consumers for reasonably predictable risk where the payouts don’t get out of hand, particularly for car and house contents insurance. But it is challenged by dealing with climate change, where statistical risk models do not hold. It tries to cover itself by charging high prices for car and house contents, and by selling products people don’t need, hoping to cross-subsidize other products.
For consumers the product is lousy. They pay too much for risk they could absorb themselves, while they are left with the open-ended risk of catastrophic loss, such as destruction of their house or business, where the insurer’s liability is capped. Insurance tends to be a “set-and-forget” product, where consumers, once having done a search, assign renewal to automatic repayment.
Combined, all of these constitute a case of market failure. There was a time when insurers were mutual organizations, rather than profit-making businesses. Automobile clubs established insurance businesses as mutual models. There were government insurance offices. But that all went in an orgy of privatization in the 1990s, and governments have tended to take a set-and-forget attitude to the insurance industry. The case for reform goes way beyond the simple issue of the industry’s concentration.
More on crypto currency
In the roundup of 8 February, there was a link to an article by Mark Carnegie, explaining three categories of cryptocurrencies. Fred Schilling, a regular reader of the roundups (and an enthusiast for Modern Monetary Theory), disagreed with my heading “Everything you need to know about cryptocurrencies”. He suggests that there is much more than Carnegie covers.
Crypto currency of earlier times
He recommends a 40-minute discussion in which Rohan Grey of Willamette University appears on Jessica "Ka" Burbank’s and Andrés Bernal’s economic podcast Funny Money, explaining how Crypto works and what it’s best used for.
In case we haven’t noticed it, while we have been enjoying the convenience of more and more financial transactions going on line, we are losing the convenient anonymity of cash. Grey doesn’t suggest that we are living in a surveillance state, but we have allowed the development of a financial architecture that could be used by an authoritarian government. He sees the potential for crypto currency to take back from the banks at least part of the financial system, particularly that part concerned with exchange rather than investment. It’s not only about minimizing transaction costs – Grey’s main point – but it’s also about the convenient privacy that we once enjoyed when we paid in cash.
Grey is no libertarian, or a defender of dark money. It’s just that he would like to see a currency that has the convenience of cash.