I’ve heard of the gap between perception and reality, but this is ridiculous. According to the experts, increased competition among supermarkets, department stores and other retailers is holding down prices in a way we’ve rarely seen before.
This fits with the consumer price index, which showed prices rising by just 2.1 per cent over the year to June. Over the past three years, the annual increase has averaged even less: 1.8 per cent.
What it doesn’t fit with are the complaints we keep hearing about the high cost of living. I read it’s got so bad parents are raiding their kids’ piggy banks to help make ends meet.
How can the experts’ reality be reconciled with the people’s perceptions? It’s simple. With a few glaring exceptions – electricity prices, for instance – the cost of living isn’t rising much.
No, the reason many people are having trouble making ends meet is because their wages aren’t growing much either. We’re used to wages rising a bit faster than prices, but that hasn’t been happening for the past four years.
Modern politicians seek popularity by reinforcing our perceptions, whether they’re right or wrong. If you doubt that, just listen to the soothing noises Prime Minister Scott Morrison will be making between now and the election.
Unfortunately, our tiresome econocrats remain committed to determining the reality and correcting misperceptions. Last week Reserve Bank deputy governor Dr Guy Debelle gave a speech which departed from the official talking points and revealed a truth which must not be spoken: the digital revolution is squeezing many retailers’ profit margins and forcing them to cut costs so rising prices don’t cost them customers.
Debelle says that, since 2015, the price of the typical food basket (excluding fruit and veg, and meals out and takeaway) has actually fallen a fraction. Fruit and vegetable prices have risen, but by only a third of their average rate over the past 25 years.
The prices of alcoholic drinks have risen more slowly since 2015, and non-alcoholic drink prices have fallen a bit.
The prices of consumer durable items, including fridges and furniture, have been falling since 2015, meaning they’ve hardly increased over the past 25 years.
The prices of audio-visual equipment – including TVs, computers and phones – have fallen significantly over the past 25 years and particularly the past three.
If you’re finding this hard to believe, there are two main explanations. The first is that, because bad news interests us more than good news, big price rises stick in our minds, but small price falls don’t. Nor do we notice when prices stay unchanged for long periods.
The second is that every new TV, computer or phone does better tricks than the previous model. The new model may cost more than old one, but when the official statisticians allow for the value of the improvement in quality, they almost always find that the underlying price has fallen. Again, this is something we should notice, but usually don’t. Our perceptions play us false.
If we’re having trouble affording the new whiz-bang, big-screen, digital, internet-connected TV, that’s not the higher cost of living, it’s us straining for a higher standard of living.
When we confuse the two we’re deluding ourselves. We’re not getting better off, we’re just having to pay more.
Debelle says changes in the cost of imported goods used to be passed straight on by wholesalers and retailers. But over the past decade or so retailers have become reluctant to pass on higher import prices.
This is only partly because consumer spending hasn’t been growing as strongly as it used to. Debelle finds evidence that net retail margins have been declining.
Cost-cutting means the productivity of labour in retail is rising faster than in other industries, with the savings used to keep prices down rather than fatten profits.
What’s been happening in recent years is intensifying competition between retailers. One cause is the advent of “category killers” such as Bunnings, Officeworks and JB Hi-Fi. These are giving department stores and smaller retailers a hard time.
The buying-power of the many chains of liquor stores now owned by Coles and Woolworths is keeping prices down and putting great pressure on independent stores.
We’ve also seen large foreign retailers setting up bricks-and-mortar operations in Australia. In clothing, these include H&M, Zara, Topshop and Uniqlo.
The biggest bricks-and-mortar disrupter, of course, is Aldi supermarkets. Aldi seems to have taken market share from independent IGA stores, while forcing Coles and Woolies to avoid losing customers by lowering their prices.
Then there’s online shopping, which exposes our retailers not just to competition from big overseas businesses but between themselves.
Online sales still make up only about 5 per cent of total retail trade, but they’re growing rapidly, increasing by 50 per cent over the year to June.
Last year local retailers trembled over the impending arrival of Amazon, but so far it hasn’t had a big impact. Not directly, anyway. Maybe the locals have taken evasive action by keeping their prices low.
Smart phones have made it easier for people to comparison shop – even while in someone else’s store.
And I believe the internet increases the emphasis on price competition, rather than the emotive advertising and marketing big business prefers.
Digital disruption is bad news for the workers in disrupted industries – including journos – but don’t let anyone delude you: it’s almost always good news for consumers.