$31 Watermelons at Woolies

such as natural gas and crude oil are used to power machines and are needed to power vehicles to transport goods and services - wagons to transport fresh produce from farmers to supermarkets... cars to transport people between locations... the list goes on. When the cost of production to supply goods and services to the markets increases, producers are more likely to increase the prices of goods and services sold (so they retain profits). Obviously, this causes inflation as the general price levels of goods and services rise.

Apart from energy prices undergoing inflation, a close reader of economics might also observe a surge in cost of services as well. Indeed, in the March Quarter, the largest contributor of inflation was medical and emergency services. How did this happen? Along with increased fuel and electricity prices needed to operate hospitals and ambulances, Australia’s aging population also drives the increase in price. The number of deaths has surpassed the number of births in recent years, reflecting an ageing population. As we discussed previously, an increase in demand also drives prices.

Furthermore, low unemployment has also driven up aggregate demand across the country. Australia’s unemployment rates reached a 30-year historical low in 2022, a mere 3.5% after businesses start to recover in the post COVID era. Low unemployment means that more people are receiving higher wages compared to lowly social welfare payments, incentivizing spending, and hence driving aggregate demand up.

With an unprecedented 7.8% inflation in the December quarter of 2022, prices are rising like never before. So, I guess the question is, when will prices go down and how are we addressing the issue?

If you’re an avid news reader, then you might remember seeing the term ‘cash rate hikes’ in the news somewhere. The RBA has raised cash rates to a high of 4.1%, a record high since the early 2010s. Cash rate hikes raise the cost of overnight loans between the Reserve Bank of Australia and other banks, which essentially raises interest rates as well. When interest rates go up, it means that the cost of borrowing is higher and there is greater return on investments. This helps reduce aggregate spending in the economy, as people see saving money as a more lucrative option to spending.

Furthermore, the recent 2023-24 budget also delivered cost-of-living reliefs aimed to help consumers cope with inflation. The Federal Government is partnering with state and territory governments to deliver $3 billion of electricity bill relief for households and small businesses, with $500 eligible for certain households. Additionally, a temporary price cap on wholesale gas contracts has also been implemented to prevent the skyrocketing gas prices.

With inflation slowing to a 7.0% in March quarter, the RBA estimates that inflation will return to an acceptable 3% in Mid-2025. Hopefully, this means that there will be no more $30.80 watermelons in Woolies the next time I visit the gym. Until then however, it looks like $31 watermelons, among other inflated groceries, will stay around for a while.

- Rob Zhang