Garry Shilson-Josling, Economist
(Australian Associated Press)
New figures back the Reserve Bank’s claim that competitive pressures in retailing are keeping a lid on inflation and also show retailers are feeling the pinch of keeping prices low.
A little-watched measure of producer prices compiled by the Australian Bureau of Statistics shows the price index for the output of the retail industry has flattened out in recent years.
The index – still experimental as it is still being developed – is not a measure of retail prices like the better-known consumer price index (CPI).
Rather, it’s a gauge of the margin between the purchase and sale prices of retail goods.
Normally, the retail margin would rise more or less in line with input prices, wage costs and other costs.
But not now.
The “Experimental Producer Price Index for the Output of the Retail Trade Industry”, to give the series its proper title, rose only 0.4 per cent over the year to the September quarter.
That’s even slower than average wage rates, which posted their slowest rise on record over the same interval.
The figures zig-zag a bit from quarter to quarter and year to year but there is a clear slowdown in the trend.
The index rose by an average of 0.6 per cent a year over the past four years, using yearly averages for comparison.
Over the preceding four years the average annual rise was nearly three times faster at 1.7 per cent.
And the average for the four years before that was even faster, at 2.5 per cent.
That slowing pattern supports the RBA’s assessment.
The central bank had been puzzled by the absence of an inflationary surge after the Australian dollar depreciated sharply from early 2013 to mid-2015.
That would normally push average retail prices up by making imports more expensive.
In an article published by the RBA in its June Bulletin, economists Alexander Ballantyne and Sean Langcake looked for an explanation and found it in heightened international competition.
“Intensification in retail competition, in part driven by foreign entrants, has compressed gross margins, and firms have sought cost reductions, including through labour productivity gains, to maintain profitability,” they said.
The RBA repeated that view in its quarterly Statement on Monetary Policy earlier this month, saying it was not sure how long the squeeze on margins will persist.
“The effect of heightened competitive pressures on inflation is expected to wane over time, although the point at which this occurs is uncertain,” the RBA said.
The ABS figures show that retailers have not yet reached that point.