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Issue #1928      August 17, 2020

Understanding the CPI

The Australian Bureau of Statistics (ABS) has reported a fall in the Consumer Price Index (CPI) of 1.9 per cent for the quarter to the end of June. This outweighs the cumulative CPI rise over the previous three quarters by 0.3 percentage points, marking the first time Australia has recorded net negative CPI increase over an entire financial year since 1998.

Many mainstream media sources, political figures, and bourgeois economists have begun to use this statistic to argue that wages should not be increased or even decreased, as the fall in CPI allegedly means negative inflation and a lower cost of living.

Even assuming that CPI is an accurate measure of both inflation and cost of living (which, as we will see, is not quite the case for either), this argument reveals a hypocrisy. When inflation is “normal” (according to the Reserve Bank of Australia (RBA), this is 2-3 per cent annual inflation) or higher, the main argument provided by bourgeois economics against increasing wages is to say that increasing wages would increase inflation – prices would rise proportionately to wages – and no benefit would be derived, only the destructive consequences of high inflation. This is despite the fact that this claim has been roundly refuted by empirical evidence to the contrary. So, according to the bourgeois economic wisdom espoused by our politicians, we cannot increase wages when inflation is normal or high, but now we see that, according to the same people, we also cannot increase wages when inflation is low or negative. No matter what the case, wages should never be increased, and any statistic whatsoever is ammunition to argue this!

What does the ABS’ CPI measure exactly? The ABS states clearly that in fact the CPI is not strictly a measure of cost of living, nor is it strictly a measure of inflation. “There is no single best measure of inflation.” This is quite true and is not a failure of the ABS’ approach, but rather a fact of the statistical complexities of these concepts. But these nuances are pointedly overlooked by policy makers and their propagandists, who instead portray the final figure as having an almost mystical power to determine the direction of policy, with little regard for the material circumstances it reflects.

The CPI is calculated based upon the prices of a particular basket of commodities, which are assigned weightings subject to periodic review. The rationale for these weightings is necessarily at least somewhat arbitrary and subject to criticism. For instance, the weighting given to housing costs is currently twenty-three per cent, based upon the fact that housing costs constitute twenty-three per cent of household spending across the entire population. However, this average is not representative of the reality for the majority of Australians, as the spending habits of the wealthy (who spend less on housing as a proportion of their income, but more overall in absolute terms) are over-represented.

Given the recent tendency seen in Australia for housing costs to rise faster than other costs overall, and the fact that this impacts working people the hardest, shows that the CPI measure of inflation does not necessarily reflect the reality of living costs for the people. And given that when there is talk about wage increases or decreases we are first of all talking about the minimum wages, the existing CPI measure is even less appropriate.

The fact that to understand the CPI we must first understand how it is calculated is made even more clear by the present circumstances. The main driver of the apparent fall in prices is that childcare has been temporarily made free by government decree due to the circumstances of the pandemic. Other factors are the similar decision by some state governments to make preschool education free; temporary reductions to rent for some households around the country, also due to the pandemic; and the unusually low oil prices. If these things were removed from consideration, we would find that inflation has remained positive. Prices generally have not fallen; this is confirmed in our living experience. There has not in fact been a general fall in prices, which is what negative inflation in a strict sense would mean.

Inflation is the phenomenon of the tendency for the value of money as a commodity to fall relative to all other commodities generally. Thus, just because some specific commodities have become cheaper or free for reasons other than a change to their long-run value, should not significantly impact the value of money itself. But the fact that these things will be reflected in the CPI figure is an artefact of the difficulties of measurement.

If it were the case that childcare being made free, and other such measures, meant inflation fell, would it then follow that our wages should rise less, or fall, because of the lower cost of living? We cannot accept that. We do not demand permanently free childcare for our wages to be reduced in kind, but because our society is materially capable of providing it and it will provide a better life for the people.

We must demand a society where production is planned according to the real conditions and needs of the people, and not just one-dimensional measures.

Next article – The politics of war

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