The Reserve Bank of Australia’s monthly announcement on the official interest rate brings with it a flurry of media attention about the cost of living and mortgage payments.
Sure, we get that when the interest rate rises, prices go up, but why when interest rates decrease or stagnate do prices continue to go up? Are we being had?
The consumer price index (CPI) rose 0.6 per cent for the December quarter and 4.1 per cent for the year ending December 2024. The current official interest rate is 4.35 per cent.
According to the Australian Bureau of Statistics (ABS), annual food inflation eased to 4.5 per cent in the December quarter, down from 4.8 per cent in the September quarter and the peak of 9.2 per cent in the December 2022 quarter.
Should our grocery prices be stablising as a result? Anyone who tracks their supermarket spend will report that prices are increasing well above interest rates and the CPI, and never ever seem to fall. So what’s going on?
Market floor
Well, the first issue is food and grocery items are in regular demand, and we can’t put off buying them until we save up, such as for a car or holiday. Solid demand will always put a floor in pricing.
The second issue is that inflation is the rate at which prices fluctuate; it does not correspond to prices decreasing. So, as inflation drops, prices do not change, but the rate at which prices increase will reduce.
Australia has only ever had negative inflation – deflation – three times since the ABS started taking records.
That is the pure economics of it. And, unfortunately, in Australia we suffer from a few other problems, the biggest being the concentration of supermarkets in the duopoly of Coles and Woolworths.
With only two major players, competition is reduced, and their motivation to cut prices is almost zero. Their motivation to increase prices is what drives their business model, and as a publicly listed company, so it should.
Are they taking advantage of their market power? Almost certainly. Can we prove it? Probably not.
Unless there is some sort of ‘smoking gun’ in the shape of an email trail or whistleblower, Coles and Woolworths can quite rightly say they are maximising shareholder profit, which is their main purpose, not selling cheap groceries.
Aldi has given them a bit of a shake in the past 10 years, but now consider the market ‘mature’, that is, they are not going to make much more investment in Australia.
Cheap pricing
Part of that investment was cheap pricing to lure consumers away from the big two. However, now they have a regular customer base, Aldi prices are much more in line with the two major chains.
IGA and other independents are another case altogether.
Although IGA operates under the same branding, the stores are owned by individuals, not a large corporation, so they don’t have the same power to influence the market.
IGA owners also all buy the majority of their stock through a company called Metcash, whereas Coles and Woolworth use their own supply chain.
As a business, Metcash also wants to maximise profit and tries very hard to charge its clients – IGA owners – as much as it can, so they are at the mercy of Metcash’s pricing policies.
Have you noticed prices rising on your grocery shop? Have you had to cut back on any items as a result? Why not share your experience in the comments section below?
Also read: How Coles and Woolworths maintain their power over the grocery market
So where we are? Confirmed duopoly. Profit maximisation (for shareholders, supposedly ‘mum and dad investment, being the main buyers). Does anyone see a contradiction? And the author’s defetists narrative: here you have a rope, go and hang yourself. It was supposedly a self-regulating ‘free market’, operating within a ‘free economy’. There is neither a free market nor a free economy. All markets and economies are regulated. Looks like the Government sleeps, while domestic and foreign oligarchs getting fat.
Because when prices rise they never fall ..
Ok I get it large corporations can do what they like, because their only reason for existence is to maximise shareholder profits.
If that is fair why isn’t there bracket creep on corporate profits to ensure they are contributing to the largesse they are extracting from the Australian public.
There should also be higher taxation on shareholder profits where they rise to the obscene levels that that are.
If profit isn’t a dirty word then neither should be taxation.
The structure of the dominant players in the grocery field is a problem. A public company whose shares are mostly owned by profit seeking large funds, needs to maximise return on their investment. Aldi is a privately owned company, which is why they could run their business in Australia at a loss at first to capture market share. Supermarkets in Switzerland are run as cooperatives where the profit motive is not upmost. The result is lower prices for consumers.
Interest rates and inflation rate two entirely different entities.
Interest rates are set by the RBA and the Banks and are “based” on the increase in CPI.
Inflation is still rising, and always will, but the rate at which it is rising has reduced, therefore prices with still rise, but how fast they rise will be slower.
Please! – if anyone even thinks for one moment that supermarket prices will go down, they are naive and delusional. Prices are STILL increasing, at huge increases. My aunt is in an aged care home, and she has a favourite little jube lolly. 2 years ago I would buy them always for $1.90 – $2. Now, they are on special – 2 for $7. That’s $3.50 each, on special! Their ‘normal price’ is $5!! People talk about fruit, vegetable,s meat, etc – but other items have just exploded. The fly spray I used to buy for around $7, is now $17.45.
They don’t decrease prices – just sizes. Arnotts shortbread biscuits are like slabs of tasteless cardboard, not light and fluffy buttery tasting biscuits that they used to be.
With the supermarkets it is called “shrinkflation”.: i.e. they shrink the size of the package, jar, etc but charge the same price.