Drivers of Australian Inflation

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

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18 thoughts on “Drivers of Australian Inflation

  1. Duncan

    Will the heatmap be available as a T-Shirt ? Maybe with a wireless chip built in so that it can update real-time as the economy tanks it.

    You didn’t want a serious first comment did you ?

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  3. Steve Reynolds

    Great work, Mule. It really tells a story. Please send a copy to Wayne and Malcolm for use in interviews!

    I agree that global issues will continue to exert pressure on food prices. I think a big part of the local problem, too, is that only two retailers (Wesfarmers and Woolworths) account for almost the entire grocery market in this country – unlike the UK, for example, where there are about 10 equivalent chains. Huge setup costs, difficult transport logistics and, as we heard today from Allan Fels, extremely unhelpful planning laws are all barriers to entry for new players wanting to crack open what is a virtual duopoly. As it stands, it’s way too easy for the Big Two to pass on their own increasing costs in a booming economy, so we get inflation feeding inflation.

  4. stubbornmule

    The RBA has now released their Board meeting minutes. They are forecasting inflation to return to their target range by 2010. Their concerns in relation to rising commodity prices focus more on the ongoing impact this will have on Australian terms of trade, feeding through to domestic spending power rather than any possibility of a global structural shift that could lead to continued imported inflation.

  5. stubbornmule

    Just got back from hearing Secretary to the Treasury, Dr Ken Henry give his post-Budget address. He described calls to abandon inflation targeting as “mis-guided”. He argued both that it was a mistake to abandon a policy framework just because conditions were getting tough but also that for Australia the current drivers to inflation are susceptible to domestic monetary policy. His position was consistent with the RBA minutes, in that he reasoned that the most significant effect for Australia of rising commodity prices is the terms of trade boost that we are experiencing which is leading to a wealth effect, creating a domestic demand shock and that domestic demand is precisely what monetary policy is designed to manage.

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  11. Inna


    Just wondering, what software did you use to create the CPI heat map? I like the concept very much – want to update the weights and colours and check how it looks now. Thanks.

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