Today, the consumer price index is released. Australian inflation appears to be in check, as the RBA keeps a steady hand on the tiller (If you are secretly unsure what the RBA does, click here.). Inflation gets really interesting over the long run.
Let’s look at what the damage will be in 2035, when we’re a lot older. It may shock you.
A pie and a soft drink at the football?
I paid $14.40 for a Four’N Twenty pie and a bottle of Sprite on the weekend. The inflation rate for Food and non-alcoholic beverages over the last ten years has been 2.9 per cent a year. Applying that to the next 20 years means that by 2035, your half time snack will be a whopping $26.75.
If you want the exquisite contemporary Australian experience of drinking a bottle of Crown Lager at Federation Square, you now pay $9. The inflation rate for the Alcohol and Tobacco index over the last ten years has been 4.6 per cent a year. Applying that to the next 20 years means in 2035, the price of the beer will be $24.
A ticket permitting two hours of travel on Melbourne’s ‘world-class’ public transport system costs $3.58. The inflation rate for transport over the last ten years has been 2.3 per cent a year. The lowest rate we’ve seen so far. Applying that to the next 20 years means in 2035, a ride on a tram will cost $5.87.
(Of course, zone 1 tickets will rise probably in price faster, since Zone 2 was turned into cannon fodder for the election.)
A pair of ASICS Gel Kayano running shoes costs $250. In 2035 that will be $235. Wait, what? Yes, it’s not all bad news on the inflation front. Some things have fallen in price in the last 10 years, especially clothing. The average annual price change in the last decade was -0.4. There’s more detail on this in a post I wrote a couple of weeks ago.
Say you want to buy a two bedroom apartment in West Melbourne with a Bruce Springsteen feature wall, like this one:
It has at an advertised price, now, of $550,000. Over the last decade, house prices have risen 4.6 per cent a year. If that continues, you’ll be looking at $1.49 million in 2035.
Here’s the good news.
If you have a full time job, and you pay 30 per cent tax on it on average, your fortnightly paycheque, based on ABS average weekly earnings, is $2012.
The rate of growth of wages in the past decade has been 4.5 per cent. By 2035, that fortnightly paycheque would have grown to $5294.
Will you be better off? Almost certainly yes. Wages have risen faster than consumer prices for most of Australia’s history, giving us improving real (i.e. inflation adjusted) income (see graph at right).
But if you can somehow arrange to want less housing and beer, and more clothing and shoes, you’re going to be even better off…