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Bananas Bending the CPI

When cyclone Larry lashed Queensland in March 2006 and wiped out banana plantations, the price of bananas skyrocketed from around $2 a kilo to as high as $15 a kilo. Supply has now come back on stream and prices are back to “normal”. Bananas represent a significant component of the fruit basket in the ABS Consumer Price index. Banana prices rose 406% in June and September quarter of 2006 and the CPI rose 2.5% over that 6 months. Over December 2006 and March 2007 quarters bananas fell in price by 78% and the CPI for this latest 6 months is 0% to leave the annual inflation rate at March 2007 at 2.4% as reported yesterday. For the next 6 months the annual rate of CPI will have the benefit of the flat quarters of December and March.

But it’s not all bananas. Some components which depend on foreign currency (overseas travel and tech equipment) are also falling due to the rise in the $A relative to yen and US. Some components are rising strongly as wage costs rise in a tight labour market. Over the year the basic family demographic costs of education, health and housing have risen 4.2%, 4.4% and 3.5%. Over the last 5 years the average annual rise in these costs within the CPI has been 5.8%pa, 5.7%pa and 3.8%pa.

So what is underlying inflation? This is something the Reserve Bank continually agonises over because it’s their job to beat us up with interest rate rises if inflation is getting out of control. From next quarter's release of the CPI, the ABS will now be publishing the RBA’s “smoothed” measures of inflation called “trimmed mean” and “weighted median” consumer price measures. So it’s going to be a 'pick your own inflation rate' environment in future. This is also becoming a political issue with individual workplace agreements replacing award wages and employees needing some benchmarks to work out what wage rises they should be getting.

Posted Wednesday, 25 April 2007


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