Inflation has slowed down, but that doesn’t mean prices are coming down.
That’s the reality we have to accept as we shift into the next phase of our fight against inflation.
Why aren’t prices coming down? What does it mean for cost-of-living pressures? These five graphs explain why’s going on.
Consumer prices keep rising over time
Let’s start with how we visualise inflation.
The word “inflation” refers to the increase in the nominal price of goods and services over time.
The Australian Bureau of Statistics (ABS) represents inflation with the graph below, but this type of graph can confuse people:
Why can it confuse people?
Because it isn’t telling us that prices are rising or falling, as you might assume.
It’s telling us that inflation is speeding up or slowing down.
When the blue line shoots higher in that graph, it’s telling us that prices are increasing at a faster rate, and when the blue line declines, it’s telling us prices are increasing at a slower rate.
If nobody told you that, you might think the falling line meant falling prices.
The only time prices actually decline in that graph is when the blue line dips into negative territory in 2020 (during the COVID recession).
So, if you wanted to represent inflation in a way that didn’t confuse people, you could present it this way:
The line in that graph tells a more intuitive story about inflation: prices are always rising over time.
And the steps in the line support that story.
When the steps get bigger, those are periods where prices are rising more quickly, and when the steps get smaller, those are periods where prices are rising more slowly.
Now, if we colour-code that graph, we can isolate different periods of inflation we’ve experienced.
See the colour-coded graph below.
The white area in the first half of the graph was a period where prices were rising so slowly in Australia that the Reserve Bank was cutting rates to try to stimulate economic activity.
The green area covers the arrival of COVID in early 2020, the subsequent lockdowns and recession, and the immediate aftermath.
The red area is when inflation became a huge problem during the Morrison government’s final term in office, starting from when prices popped up more quickly than expected in the June quarter of 2021.
Prices then really took off at the beginning of 2022, growing at faster and faster rates, all the way through the 2022 federal election campaign and up until the end of 2022.
The orange area is the period when the rate at which prices were increasing finally began to slow down (that process began at the start of 2023).
The yellow area captures the last six months of 2024 where prices increased slowly enough to convince the Reserve Bank that it could start cutting interest rates this year.
Prices have increased 20 per cent in five years
Now, if the pace of inflation has finally fallen and the RBA has started cutting interest rates, does that mean prices are coming down?
It doesn’t, unfortunately.
The prices of some individual items may decline in coming years, but the overall price level won’t (unless we experience a recession).
After those five years of COVID, recession, lockdowns, and high inflation, consumer prices are now 20 per cent higher than they were at the beginning of 2020, and they’re not coming down again.
Here’s what RBA governor Michele Bullock told federal MPs on Friday:
“The impact of high inflation over the past couple of years has permanently increased the price level. That has hurt everyone but particularly those on lower incomes and the more vulnerable,” she said.
And since the price level is permanently higher, the fight against inflation is entering its next phase.
The political fight has shifted
Since prices are now permanently higher, we have to get wages growing faster than inflation (underpinned by productivity growth) so the currency in our pockets regains the value it lost from years of high inflation.
But according to the RBA’s forecasts, that process could take years.
What does that mean?
It means the “cost of living crisis” is going to remain a personal problem for millions of Australians for a number of years, until their wages and disposable incomes catch up to the new higher price level in the economy.
See the graph below.
In real terms, real wages (the blue line) have been falling in Australia since March 2021 (from that point in time, every dollar in our pockets has bought less).
And since March 2022, our wages have been buying less than they could buy in 2014 — over a decade ago.
In the graph, when the blue line fell below that black horizontal line (when it slipped below 100), the real value of wages was less than they were in 2014.
That explains why Australians are hurting so much. It explains their anger and frustration.
It’s why people don’t want to hear politicians celebrating the victory over inflation just yet, if those celebrations imply that things are back to normal for everyone.
Millions of Australians want their personal “cost of living crisis” to be over and that means getting the blue line in that graph back above the black line, and then getting the blue line to rise even higher so people feel like they’re finally getting ahead again.
Now, you can see in the graph that real wages (the blue line) have already started growing again. There’s been constant growth in the past two quarters (the last six months of 2024).
But wage earners still can’t buy as much as they could in 2014.
During the federal election campaign in 2022, the Morrison government had a slogan to warn about the dangers of electing Labor: “It won’t be easy under Albanese.”
When you look at that graph above, that slogan was prophetic.
Of course it wasn’t going to be easy under Albanese. Real wages had already fallen below 2014 levels by the time the Albanese government assumed office in May 2022.
