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Relative price trends

The RBA have an easy-to-read discussion of relative price trends in the Australian economy since 1993.  Since the introduction of inflation targeting in that year overall inflation has been kept to around the centre of its desired range, about 2.5%.  But some items have got relatively cheaper while other items have got much more expensive.

Manufactured goods prices have barely changed over the period (annual 0.1%). Cars, clothing and footware have all got cheaper – thanks China, tariff cuts and technological improvements – the latter obvious for such things as cameras and TV sets. The only manufacture that has got significantly more expensive are books and newspapers (3.6%).  I still feel conflict when I have to set elementary microeconomics texts that cost over $100 per volume but which in the main mimic books written a decade or more ago ago. Eventually I hope to move all my students onto free online texts that will help put a stop to this extortion.

The items which have got distinctly more expensive are the things that dominate the Clarke family budget – food and beverages (3.9%), fuel (3.6%) and education costs (5.2%).  Insurance costs have also grown strongly.

In the main it is discretionary items which have fallen in price while the essentials keep on increasing in price.  Its probably why I experience increasing pressures on the family budget.

14 comments to Relative price trends

  • Uncle Milton

    Has the Clarke family changed its demand patterns in response to these relative price shifts?

  • hc

    Uncle Milton, That question forces introspection.

    The education costs – having paid for, in all, over 3 decades of private school fees has had massive effects on household finances.

    It has driven me to do outside consulting work as a (sometimes intensely disliked) necessity and, with some ‘mental accounting’, made me cautious about offering to fund progeny HECs fees. In fact I don’t pay these. Optimal investments in progeny human capital have been made accounting for my own selfish future needs!

    The main effect of education costs has been to force a large aggregate dissaving. Substitutions alone would not have effected the required financing.

    The main thing I have stopped doing is taking family holidays overseas although individuals still travel. Indeed when newly-weds have asked me about the economics of private schools this is a cost I recall mentioning.

    On food – I think less restaurant meals and much, much, much less expensive wine. Indeed my cellar’s asset value has crossed my mind in thinking about flogging off assets to pay for school fees but no I didn’t!

    Our demands for high quality food are inelastic so I think our bills have more than doubled over last 12 years. In part I rationalise this by saying we don’t eat out that much.

    Fuel – we run two cars and I watch petrol consumption but not carefully. I traded in a 4-wheel drive for a small Camry so I guess there was an impact.

    What is interesting are the things that became cheaper. We have lots of computers (7) but no flashy TV sets or quality cameras. There is some kind of price effect here but these things are, as I say, discretionary – you buy them after paying core bills.

  • Uncle Milton

    Obviously I have no idea what your household income is Harry, but I do know what the advertised salary is for a professor and that alone would put you in the top 1-2% of income earners. Yet it doesn’t sound like you live the high life. Of course, those private school fees are just crippling, coming as they do out of after tax income. The proportion of disposable income spent by people like you on educating children is mind-boggling, when you think about it. This isn’t a criticism. As they saying goes, it’s a good strategy to be nice to your children, because they get to choose your nursing home.

  • Matt C

    Very interesting Harry. Thinking about my household budget though, there are many things in it that did not exist 15 odd years ago. Internet, pay tv, mobile phones; things have changed a lot!

  • conrad

    I’m with Uncle Milton. Having gone to a fairly average school, I sometimes wonder what I’d been doing now if I my parents hadn’t use the cheapskate option (perhaps I’d be working at La Trobe 8-), although where I am is fine). I’ll make sure that enters my calculations if I have to pick their retirement home/hovel.

  • hc

    Conrad, I studied at a public school – my parents didn’t exercise the cheapskate option – they could not have afforded private schools even if they wanted to.

    I am ambivalent about private schools actually. Its a train that once you get on is hard to get off. The main source of ambivalence is the expense – parents have rights as well as kids. I spent too many sleepless nights wondering how bills would be paid – that is a real cost.

    But I think the quality of education my kids got was good – not really good – and the standard of pastoral care excellent. If they upgraded the public system I would have no hesitation sending my kids to public schools.

  • Uncle Milton

    The economics of private schools is very interesting. The fees have gone up enormously in real terms, relative terms, however you want to look at it. If someone like Harry struggles to pay the fees, who doesn’t struggle? QCs, investment bankers and surgeons maybe. Harry, if the trends in these fees continue, what do you think of the channces of your children being able to send their children to the same schools? (On current trends, private school fees in one generation’s time will be $70K per child per year in today’s dollars.)

  • hc

    I assume there will be supply effects that offset some of the price increases. Indeed given the local monopoly power enjoyed by some of these schools there might be a case for privatising some public schools – for example those facing closure because of demographic effects.

    As with universities there will be pressure from some public schools to charge further fees to improve facilities. My blood boils when I hear middle class parents griping about having to pay $1500 in out-of-pocket costs now in the public schools.

    My main concern is that we are not recruiting the best people into teaching. Teaching should be an honourable and well-paid profession. It often isn’t.

  • chrisl

    Harry. Have you ever worked out how much money you would have in an investment account if you had have deposited the money there instead of to the private school? And how much you could have given each child on their 21st birthday,?
    I find it interesting that you have attained the position you have with a public school educatuion but feel your children need a private school education.

  • hc

    Apparently returns on investment in human capital are quite high relative to financial asset returns. So you are better off giving your kids a good education that the corresponding accrued asset value. If you are only self-interested then investing in human capital is stupid.

    The public school education I got was excellent. I am unsure that public schools are as well placed these days.

  • Uncle Milton

    Harry, you should have spent your career at ANU. That way you could have sent your kids to Canberra public schools, which are very good. (And because relatively few people send their kids to private schools in Canberra, there are few social pressures to do so.) You would have saved yourself a small fortune.

  • Natalie Trigear

    I am having a big fight with the father of my 9 year old son, I want to keep him in public school and try and get him in selective high school. If you look at the HSC scores for the last three years the selective schools are some of the best performing.

    I can’t afford the fees and he keeps saying he will pay, but I can’t trust that is always going to be the case. I looked into personal loans just to do a “proof of concept” if I was going to do it my self. I went to this site: http://mozo.com.au/personal-loans and even at the best rate of 9.99% a $21K tuition would bankrupt me. If it still continues to climb at the rate above it truly will be out of the reach of the average family income.

  • hc

    Natalie, Selective public schools are a good option if your children are very bright. Good public schools generally are excellent but often have residence restrictions.

    If it is borderline feasible now then don’t go the private school route. Too many worries and too much pressure.

  • Uncle Milton

    A friend of mine has sent his kids to the local high school. It’s not that he can’t afford private schools, it’s that he’s a cheapskate, had a bad experience at a private school himself, and is an anti-intellectual who places no weight on the value of education.

    The kids are doing fine.