This story is meant as a roadmap to the politics of the next couple of years. Labor is up for election in 2025, and it might think defeating inflation would be a big achievement it should boast about during the campaign.
But the Voice referendum shows the government hasn’t taken the temperature of the electorate very effectively. This piece proposes a better way to do that via an Inflation Anger Index.
Like it or not, people care about cost of living above all else. And they’re going to be mad on this topic for ages. Here’s why.
Inflation is like looking at the sun: there’s a painful aftereffect. Our inflation is on the way down, as the Australian Bureau of Statistics reports, but that isn’t reflected yet in voters’ perceptions. The Reserve Bank defines inflation as a 12-month change in prices, but people don’t operate on such a rigid schedule. We think about price changes over different time scales.
It will be a big achievement if the government can do it, but voters won’t give it credit. If the policy wonks in Treasurer Jim Chalmers’ office try to hijack the Labor campaign and say this is a big accomplishment, the people will be furious, the 2025 election will be lost, and we will get a prime minister in Peter Dutton.
This matters because, as the next graph shows, while prices may not have risen much over the past 12 months, they are still way higher than pre-pandemic.
A smarter way of thinking about perceived inflation would recognise some people have longer memories than others, and blend those three series together. So here’s the simplest version of my “inflation anger” series. It puts equal weight on one-year, two-year and three-year inflation, and shows why inflation anger has not yet abated.
This alone should be enough to stop Labor from putting its foot in it. Remember, some people are comparing prices to pre-pandemic. But still the index is not quite as nuanced as it might be. Some prices are more salient than others. People get very angry about fuel prices, for example, because we don’t vary the amount of fuel we buy with the price. It isn’t actually a huge part of the household budget but it affects inflation perceptions.
So what if we varied our inflation index by the most recent changes in the price of fuel? Here’s the same chart from above with fuel added.
That’s more volatile, and also higher more recently. It’s a more realistic measure of whether people are mad about inflation in any given month.
But we could make it reflect the situation on the ground better still, because inflation doesn’t include mortgage payments, and those are hurting the household budgets of a big chunk of Aussies. Roughly one-third of people are paying off their home, roughly one-third are renting, and roughly one-third own outright. The one-third who are paying off their home are particularly down in the dumps right now because of high repayments.
None of this is scientific — but it illustrates the following: concern over rising prices isn’t the same as official inflation. But that’s not because people are economically illiterate. It’s because inflation is a narrowly defined technical thing whereas price concerns are broader and last longer than 12 months.
Here’s my final version of the Inflation Anger Index, including RBA data on scheduled home loan repayments.
The difference between this version and the last one is that it goes up more steeply in 2023 than in 2022. (It also has only quarterly data rather than monthly, thanks to limitations at the RBA.) While inflation was acute last year, home loan increases are acute this year as loans flip from fixed to variable rates. And the more your mortgage costs, the more the new high prices in the supermarket seem an outrage.
Could this rapid souring of personal finances during 2023 have explained why polling on the Voice flipped over the course of 2023, leading to the defeat of the referendum in the mortgage belt? I’d certainly be bearing that in mind if I were a Labor strategist. Because what these indexes show is the scarring of inflation is going to last a long time.
Anyone who dares crow about having defeated inflation — according to its technical definition of a 12-month rise in prices — will face scorn. Labor needs to focus on something else altogether if it wants to win in 2025.
