Inflation in Australia has been running well outside the 2-3% range targeted by the Reserve Bank of Australia—the most recent figure was 4.3% for the 12 months to March 2008—which is why interest rates have been on the rise for the last couple of years. So what has been driving prices up in Australia? One useful way to get a sense of what has been happening is to use a type of chart known as a treemap (sometimes called a “Map of the Market”). These charts tend to be pretty busy, but can be a great way to explore a rich set of data.
The treemap chart here is a “heatmap”, showing the contribution that different categories of expenditure have made to Australian inflation (and was inspired by a similar chart in the New York Times). These categories are arranged into larger category groups: housing, food, etc. The area of each box in the chart indicates the weight of each category in the consumer price index (CPI): the bigger the box, the bigger impact on inflation. The colour of each box shows whether prices are going up (red), down (blue) or staying the same (white).
Inflation Heatmap – March 2007 to March 2008*
(click image to enlarge)
Not surprisingly, the chart has a lot of red in it: overall prices in Australia are going up. Most of white and blue regions are made up of manufactured goods. Computers, flat-screen TVs and other technological goods keep dropping in price and the strong Australian dollar has gone some way to help keep down the price of other imported goods (although retailers tend to use a strengthening dollar to bolster their margins rather than passing on price reductions). That’s the good news.
The bad news is in the red zones and much of the trouble is coming from food and energy. The food section is all red and dairy is the reddest of them all, while energy is showing up in price rises for household utilities (which include gas and electricity) and private motoring (which is mostly made up of petrol).
The challenge here for the RBA is that although Australia’s drought has been a factor, the rising cost of food and energy is a global phenomenon. Grain prices have been soaring in recent months. Soaring prices have led to food riots in some countries. Rice prices recently reached record levels, doubling since last year. Governments have acted to prevent hoarding and some countries are moving to release stockpiles, but all the signs that the recent era of cheap food has come to an end. The prospects for energy prices are hardly rosier. Not so long ago, analysts were getting worked up about the prospect of oil reaching US$80 a barrel, and now it is close to US$130!
The problem global food and energy price pressure presents for policymakers in Australia and elsewhere, is that it leads to imported inflation and attempts to curb domestic demand by hiking rates are not likely to have much effect as everyone still needs to eat, have showers and travel to work. Don’t be surprised to hear much more about food and energy prices in the months to come!
After 10 to 15 years of central bankers patting themselves on the backs for controlling inflation, things are starting to get scary. No wonder there are increasing calls for central banks to abandon inflation targets.
* Source: Australian Bureau of Statistics