Inflation is bananas

Every so often we see news reported in the media that sends a wrong impression.

An example was the Consumer Price Index for March, released on Wednesday.
The CPI - Australia's measure of inflation - showed

1.6 percent for the March quarter, and 3.3 percent inflation for the year to March.
A normal quarterly inflation figure is around 0.6 or 0.7 percent. And the Reserve Bank is supposed to use official interest rates to stop inflation rising above 3 percent.

Many news outlets feared that the RBA would have to put up interest rates.
But have a closer look at the March CPI. The CPI uses a basket of eleven goods and services and tracks them by quarter and by year, to see how the prices change.

Using averages, the index is formed. And as we know, averages can be thrown out
by aberrations.

Take food, which has risen by 4.3 percent over the year to March. Even though the prices of staples such as bread and milk are lower than they've been for years, the Queensland floods and cyclone Yasi wiped out many crops, forcing up the price of fruit and veggies. But the one that really jumped was bananas - in some places they are $14 a kilo.

It's a an aberration that will be corrected by the Reserve Bank when they look at 'weighted' mean and 'trimmed' mean.

It is from these medium-term trends that the Reserve Bank will decide about interest rates - not from a known shortage of fruit and vegetables, and one kind in particular.

Other elements of the CPI were predictable: the 5.9 percent increase during the quarter in education looks steep, but it's the quarter when schools start and raise their prices for the year.

Another stand-out is alcohol and tobacco, at 11.2 percent rise over the year to March. But most of the price of alcohol and tobacco is excise and taxes, which doesn't suggest problems in the Australian economy.

It's a similar story for the rising costs of transportation which runs on oil products, and oil prices have
been rising.

The RBA knows this and I'd be very surprised if interest rates go up this week.

Still, it is concerning that the big movers in the March CPI were the inelastic items: food, transportation and housing (which shot up 4.8 percent over the quarter). There is certainly pain in the community and it seems unfair that raising interest rates is how we deal with high prices.

However, we have some smart people working at the Reserve. We're not a banana republic, as one politician once called us, but for now we have banana inflation.