Quick Shots - 26/Jul/2022

The Reserve Bank Gets A Review

I guess there is some kind of informational osmosis going on. about half a decade ago I was complaining about how the Reserve Bank of Australia miscalculates inflation deliberately in order to suppress interest rates. After all, most central banks benefit from political support if they err on the side of lowering interest rates. Ben Bernanke totally missed the GFC coming his way but once it was underway, he dropped interest rates to maintain liquidity in the market and rode that to the cover of Time magazine. The next time there was a major threat to the economy, central bankers around the globe slashed interest rates and in the case of our own RBA, they made noises to the effect that they didn't see rates going up until 2024. 

Now, to be fair they didn't anticipate the Russian invasion of Ukraine, and also the supply shock of China which is still trying to fight the pandemic with a Zero Covid policy which has delivered unto the world a supply chain shock. These things combined have created the kind of inflation that not even the statistical gimmickry can hide. 

All the same it's been a solid decade of ultra-low interest rates, and house prices have gone stratospheric. In the same decade, the RBA has been struggling to see wages rise, and so there is an affordability crisis that has supplanted the Global Financial Crisis itself. You can understand that as the bill for the GFC has been handed to the Millennials and nobody is taking responsibility. And, as you know, I'm not a Millennial and even I think it kind of sucks for them.  

What really sucks in this turn of events is that the inflation in question still not a demand-driven inflation. It's not like people got massive pay rises and they've gone to spend their pay rises en masse. It's not even all the printed money of quantitative easing because the benefits of those tend to go to banking and other financial institutions and not the regular folks on Main Street. So much for the notion that the RBA wanted to wait to see wages increase before raising interest rates.  

Worse still, companies are using the inflation as cover to rase their prices exorbitantly. "oh there's inflation, our costs are up," they say and somehow they're turning in a truck load of profits in their announcements during this reporting season. It all seems like the central banks of the world rig the markets exactly so the ordinary Joe and Jane can't get ahead. It really is worth asking if the RBA really working towards making people's lives better if the outcome is out of control house prices and stagnant wages. If the exchange is that people have to lose jobs to tame inflation, you sort of wonder who exactly it is that is benefitting from this lowering of inflation through raising of interest rates. i.e. If I have to lose my job so interest rates can go up and then inflation gets beat, who is getting ahead here? 

In that light, it is unsurprising then that the ALP government has decided to review the RBA's role.  It's about damn time somebody looked into this racket. 

Russia Ukraine War Drags On Still

The dumb war without any hope of a Russian victory drags on in Ukraine. Still, the deposit in the Kremlin does not accept he doesn't  hold a hand resembling a winning hand. The world awaits for the penny to drop (maybe, maybe not), or for a coup to happen (less likely) in the Kremlin. A lot of people are needlessly getting hurt and killed all because Putin has lost touch with reality. Worse still he has insisted on his army proceeding with World War II era tactics and the casualties on the Russian side have been spectacular/ horrifying (depending on how you view it).

A basic comparison of the USSR army that invaded Afghanistan in 1978 and the Russian Army of February 2022 shows that the Russians are weaker now than then, and that they waded into a war with an opponent who is quantitatively and qualitatively much better than the Afghanis they faced in 1978. When you factor in the global first world support for Ukraine, there is not a scenario in the conventional war sense that Russia can win. 

None of this couldn't have been how the war was conceived in Moscow. Now that the Russians are finally culminating, it's worth asking if Putin actually has any kind of exit plan. Because staying on in Ukraine is going to kill a lot of young people, and Russia's demographic can't afford that. So really the only question that remains is when the hell is Putin going to realise what we've known for some time? 

I guess we're going to have to wait and see. Whoever replaces him is going to have to give up on they 'Greater Russia' horseshit just to get back to the negotiating table. 

View From The Couch - 22/Feb/2017

A Quick Note About Inflation

It's been this blog's contention that inflation has been under-reported for a very long time. It happened because the incentives were lined up in such a way that under-reporting helped successive governments point at figures that made it look like inflation was tamed, as well as businesses that wanted to borrow money more cheaply from banks, and so it suited them that inflation was under-reported and thus resulted in lower interest rates.

The net result is that we have today whereby Australian households have record debt, and housing affordability is at a minimum, while interest rates are also at a minimum which encourages maximum borrowing, and therefore in a circular manner contributes to the record debt. This is against the context where the ABS cost of living index has come in much higher than the Consumer Price Index for well over a decade.

A week ago Pleiades sent me an AFR article, and lo and behold, somebody is saying exactly that:

Martin Conlon reckons the so-called "great moderation" of the past two decades is, not to mince words, "bollocks". And investors need to wake up to that fact if they hope to get anything out of the local sharemarket in the coming years. 

At this past week's Portfolio Construction forum in Sydney the head of Aussie equities at Schroders Investment Management told a packed auditorium that "we have been sold down the river" by central bankers who "have been asleep at the wheel for 25 years". 

This may all sound like old hat to you, but it's worth taking that little trip down memory lane to appreciate where Conlon is coming from and why it still matters now. 

It was once common currency that central bank mathemagicians had tamed the business cycle. The developed world was growing at a solid and stable economic growth, and those damaging inflationary outbreaks were a thing of the past.

The GFC came along and exploded that conceit. Rather than fostering stability, low rates had fed a massive run-up in debt that, via the US housing market and helped along by dodgy lending and misincentives, almost crashed the world's financial system.

But instead taking a new tack, central bankers doubled down via quantitative easing and pushing rates to zero and below. 

Conlon's biggest bugbear is how this has happened thanks to the narrow definition of inflation as the movement in a basket of consumer prices. CPI growth has indeed been low and contained for many, many years.

But he finds it "anomalous to say the least" (read: bollocks) that we can say that building material prices going up is inflation, and is therefore bad, but you put them all together in a house, and when the price of that goes up, it's good.

The very details of how the central banks calculate inflation is hidden from view, but occasionally we're given a glimpse and we find that it includes things like extreme luxury vehicles. Given that they are by nature stable in pricing, and outweigh the price of household staples of any description, it's easy to see how the Central bankers have found it relatively easy to suppress CPI figures for quite some time. Add in the fact that if you choose to look at things that are least vulnerable to inflation for your index, when there's actually any inflation (or deflation) going on, it's even harder to find any movement to your index.

 So, here we are today and the consequences are what we have - high private sector debt, low growth, historically low interest rates, terrible housing affordability, and a Reserve Bank that is suddenly a little concerned about all this. 

"We have been seeking to balance the risks from having inflation low for a longer period against the risks from attempting to increase inflation more quickly, which would partly occur through encouraging more borrowing," said Lowe, who has kept rates steady since last easing in August. 

While there was a danger low inflation could lead to a self-fulfilling decline in inflation expectations, he did not see "a particularly high risk" of this in Australia. 

However, he did see risks in encouraging more borrowing by households where debt to income ratios were already at record highs. 

"At some point in the future, households having decided that they had borrowed too much, might cut back consumption sharply, hurting the overall economy and employment," he warned.

"It is difficult to quantify this risk, but it is one that is difficult to ignore."
This is a major reason financial markets have almost priced out the chance of another cut in the current 1.5 percent cash rate following two easings last year. 

Lowe noted that high levels of debt combined with subdued wages growth were already making households wary of spending freely, choosing to save more instead.
While some pick up in wages growth was expected, the RBA's liaison with business suggested the upturn was not imminent, he said.

Knowing what we know, that all reads really funnily. The RBA is worried that the illusion of low inflation they've created might lead to a deflation through perception - but the governor doesn't see a high risk. If the CPI is masking inflation, then yes, the physical economy might just prove to be entirely different to the fiction created by the CPI. Given that the CPI is what it is - an elaborate fiction - it's hard to see how there would be a real deflation breaking out anytime soon. 

The governor then follows with the idea that households borrowed too much money and can't spend, so if the interest rates go up, it "would cut back consumption sharply hurting the overall economy". It's contradictory that people have money but won't spend because they have an expectation of deflation, but at the same time have no money because they're stretched to their limits with debt. Furthermore, if inflation has been under-reported for a while, there's a good case to have a bias towards tightening, but the governor seems to be making a case as to keep things as they are.

Should we be worried?

If doing it wrong for 20-odd years has become the new normal, resulting in very distorted outcomes, do we begin to worry or do we consign such worries to outliers and pay no heed? If you set sail from Sydney for LA with a broken compass and three weeks later you find yourself sailing in the antarctic ocean amongst the icebergs and penguins, do you worry? I don't know. I would, but the RBA seems to think not. It's steady as she goes and onward into the storm.
I don't know how this is going to get unwound. I imagine a black swan is going to come and shit all over the status quo. The outlook is rather bleak that way.

Deflation Shock?

What They Mean By Deflation

Where do we start with the news that we saw deflation in Australia in the last quarter? We haven't seen deflation since 2009 when markets were at their nadir after the GFC broke.

The surprise drop in the price of a wider-than-usual range of items drove the Australian dollar down more than 1.5 per cent and could force the Reserve Bank of Australia to cut the cash rate as soon as next Tuesday, say economists. 

The Australian Bureau of Statistics said on Wednesday the consumer price index (CPI) contracted 0.2 per cent in the three months to the end of March, taking the annual rate to 1.3 per cent, compared with 1.7 per cent at the end of December. 

More importantly, the core annual rate, after lopping off or re-weighting volatile items such as fuel, came in at 1.55 per cent, well below the bottom of the Reserve Bank of Australia's target band of 2 per cent to 3 per cent. National Australia Bank described the core inflation rate as "the lowest ever".

And so we are led to believe that interest rates will be cut soon. 

I know it's contrarian of me to say this, but the inflation rate has been under-reported since the ABS changed the way it measures inflation rate. Given that it is prone to (or rather, intended to) under-report the inflation, it's not surprising that a few commodities dropping below trend would give rise to such figures. In particular it's notable that health, insurance and education still went up. In an overall sense, things are not getting cheaper  in the cost-of-living stakes as the deflationary figures would have you believe. It's not even certain that the deflation would persist into the next quarter. 

Still, the cheated inflation rate has led to a very big tendency towards looser monetary policy which has fed the Property Bubble through low interest rates. In a way it is a self-defeating feedback cycle where, as inflation is cheated downwards it creates conditions for lower interest rates, which in turn create conditions that results in a Property Bubble forming because there is nowhere else for the money to go. As more and more money is tied up in Property and Financial instruments, the less money is spent in the economy so there is even more pressure downwards on inflation figures but not necessarily inflation itself. We know there must be heavy duty inflation going on somewhere because the very definition of inflation is too much money chasing too few assets, and Australia for all its riches isn't that rich in assets beyond housing and mining and banking.

What should be galling to the Government if not the RBA is how all the money that's flowed into the market through low interest rates is finding a way not into industrial capital investment but into housing and property. Given the lowered interest rates there should be a lot of money going around but somehow it all finds its way to the big four banks who then don't invest in anything because, well, there's nothing of note into which to invest. While the mining boom was going on, there were any number of things in which to invest, but the post Mining Boom economy has shown just how hollowed out Australia's economy has become. 

Let's face it, the most glaring problem might be that even at 2% official interest rates, there is only anaemic economic growth in a country that cannot be described as mature industrial. It's not like wages are rising rapidly. It's not like the government has a plan beyond being excited and wanting to be agile. It sounds as hollow as the economy when the same government spent enormous political capital crippling the NBN. Should our country be in the sort of economic-figure-doldrums like Japan, Germany or France? 

From TwIRP Towards ZIRP

Of course, the markets are factoring in a couple of rate cuts this year. If they do cut 0.25% in May and the another 0.25% by the end of the year, we'll be a lot closer to ZIRP than ever before. 

I don't know if the Property Bubble is starting to affect people's spending, not so much through debt being a problem, but more in line with the fact that lots of Millennials are staying at home. They probably won't be buying whitewoods for a start but they are also restricted as to just how much stuff they can buy if they're still dwelling in their parents' house. There's a lot of demand right there that's essentially blocked by the very physicality of the economy. Even if people had money to spend, they can't buy things because they have nowhere to put them. They can't spend on services because in most part they are met easily by living at home. The only things they do buy are gadgets like smart phones. 

Indeed, one of the interesting things about the Property Bubble in Australia is that has been going on for so long that it hasn't needed to pop to significantly hinder economic growth. The low interest rates that continue to fuel extraordinary valuations has led to record profits for banks, and that's no accident. The post-GFC economy might be hard on primary and secondary industries but the financial sector has been doing really well on the back of all the easing.

And lets face it, the Central Banks of the world are most likely swayed by the opinions of bankers so it comes as no surprise that banks have made out like bandits under these loose monetary policies. Pretty soon all the bankers are going to be telling the Reserve Bank how 'deflation' is killing asset prices and make it like there's a major crisis going on out there in the various markets. If the deflation goes two or three quarters, it will be a clamouring of bankers knocking on Glenn Stevens' door. You have to wonder then how long the RBA is going to take before it gets down to Zero Interest Rate Policy. When we get there, we'll understand the wealthy have locked in their advantage, and that Australia is officially 'post-industrial' like Japan and European countries with low interest rates, low inflation, and low growth. The joke would be that we were hardly industrial before we got there - we put the money into housing and the road came to an end.

John Howard Did Us No Favours

I guess you have to go back in time a bit to the Howard Government to see where the number-fiddling started. Unemployment in the second half of the 80s and first half of the 90s was a big thing. The figures were such that it was part of John Howard's pitch that he would bring these figures down together with the high interest rates. It was under the Howard Government that welfare was cut and privatised, while pushing people off unemployment benefits and on to things like disability pensions. It was an attempt to recategorised the people who couldn't easily find employment so that they wouldn't all show up as unemployed. They no longer showed up as unemployed so it looked like the Government was finding people jobs.

Similarly the under-reporting of inflation started during the Howard Government. When governments talk about inflation rates of the 80s and 90s as if those figures can be compared directly, they're being mightily disingenuous. Back then the inflation rate and cost-of-living figures were in line and almost interchangeable. Today, there is a huge blow out in the difference between the inflation rate and cost-of-living, so much so nobody's even talking about it any more.

So if part of the Howard Government's big achievements were lowering unemployment figures and interest rates then it did so by cheating on the numbers. By cheating so hard it set up this decade for the inherent contradiction of its claims to surface. The economic growth figures are so low because the Howard Government didn't make proper investments in its time - it chose to fiddle numbers and created the conditions for the Property Bubble to manifest instead. Now it's time for the subsequent Coalition government to clean up the mess but it's flying blind because the numbers are phoney. All thanks to the Howard Government.

But hey, we kept our AAA ratings!

Bloody Monday - 2015 Edition

Well, What Goes Up, Must Come Down

It's been this growing disquiet all year around China. The cracks were showing but maybe the market was in denial. Or maybe they convinced themselves all was well in the face of the share market rises in Shanghai. After all, if the shares are rocketing up, something must be going right in the market, people figured. But slowly we kept hearing things that belied that simple understanding. We heard that the growth figures were not something measured, but more like aspirational targets expressed by the Communist central government, which would prompt everybody to chip in and hit the target. We had read reports of ghost cities built on borrowed money with price tags too high; and then of course there was this notion that China would simply move to a consumer-consumption driven economy.

This must be the month where it all went out the window because fear has gripped international markets and everybody's selling out their positions. They're not even going to wait for October, they're going, getting right out. And so we're seeing the entire worlds' markets all retreating at once, one retreat feeding on to the next in the timezone domino of market collapses. It hasn't been quite like this since 2012, and quite honestly, it's sharing hallmarks of the 2007 collapse. It's all very ugly because the problems of 2007 haven't been solved enough to make us weather these moments better than 2007. And of course 2007 turned to the bailouts of 2008 and the rest fit has been about kicking cans down the road, which of course includes the Greek situation which is tethered to the rest of the PIIGS.

In short, we're on a clock of about 12 to 14 months before the Lehman Moment gets a sequel and people will scramble for bail outs - on the eve of a Presidential election. All the same, the most important notion is that this time, there's nowhere to go. They can't go below ZIRP to stimulate more credit growth; they can't cut taxes even more to stimulate consumption - that trick's already hit its limit; and none of the creditors can afford to let the debts go bad because it would blow up their own position - which last time prompted Quantitative Easing so people could get over the hump. "Moral Hazards" - and I say that with irony because you know it turned out that it was more important to save everybody's bacon than encouraging "Moral Hazards".

So depending on how badly this drop affects Australia and its consumer sentiment, you can count on the RBA to go to ZIRP, just to support asset prices. There's not much more they could do as the perfect storm hits for the second time in a decade.

AUD $60 Billion In A Day

Just how crappy was the All Ords today? Take a look at this:

Ouch. A few weeks ago, the ASX was hovering closer to 6000 than 5500. There was talk of a secular Bull Market forming, even though the earnings were not exactly like for what people had hoped. The splatting sounds you're hearing are leveraged investors leaping off the ledge. At least, it used to be in the 1929 crash. It's early days yet as investors will go on a big purge of companies carrying too much debt. The four major banks have beaten a retreat of 20% off their highs this year, just in this month, so this could transmogrify into something a bit scarier quickly. If you cast your mind back to 2008, when global credit totally seized up, there was talk that banks would fail and there would be a big run on banks. At the time Kevin Rudd stepped in by guaranteeing deposits and backing the banks to the hilt. He took lightning fast action to stave off the GFC induced collapse of banks.

This time, we're stuck with captain Snaily Failure in the Lodge, so we may not get a Decisive bit of action out of this idiot government until it's too late and even then it will likely be too little. Some ideologue - I'd guess Cory Bernardi or Eric Abetz - will bang on about moral hazard as Sydney and Melbourne property markets descend into carnage. Remember, we've got record private sector debt. A lot of positions are ready to burst if the margin calls are made. Hold on to your hats!

You Know What's Weird? Gold

Gold is a commodity as well as the metal by which currency used to be measured. Of course, none of the major currencies have the God Standard going, and it's been this way since Richard Nixon shocked the world and took the US Dollar of the gold standard. You'd think with this crisis brewing for the last few weeks that Gold would go up as people lost faith in equities and bonds and fiat currency notes. But no - it's been going down.

...which is weird.
So, in 2008, they start QE and you can understand the impulse to buy gold because, hey, they're "printing money". We would expect to see the sort of inflation that broke out in Germany between the war as it printed money to pay off the reparations for World War I. Now, inflation an the measurement thereof is a separate bugbear, but there simply hasn't been that kind of inflation going on. Instead the Central Banks have worried about deflationary pressures and so interest rates have plummeted to zero or near-zero in many advanced economies. Gold peaked at 2011, but has been sliding ever since - which I suppose suggests the inflation expectation is less than zero, and has been for a long time.

When you include the fact that gold actually has commercial uses beyond just being precious, then it makes sense that the Commodities collapse as well as the ongoing deflationary pressures has pushed gold down to this level we see today. What's weird is that if fear was really running around the globe, you would expect that gold price to jump.

Once More For The Dummies Blowing Bubbles

I'm Just Sitting Here Watching The Bubbles Go Up (I Just Had To Let It Go)

Yeah, I know I know. I've been saying there's a property bubble in Australia and it dates back a good decade and a half, but the RBA, Treasury and all governments have been talking it down for the entire time. All of a sudden this quarter, Treasury, then the RBA have come out and stated they've seen the elephant in the room. What's even more astounding is that in the face of expert advice, the Prime Minister said he just wants property prices to go up because it's in his personal financial interest; Worst-Treasurer-Ever Joe Hockey said, get a better job if you want to buy into property; and the real estate sector pundits are coming up with all manners of statistics why it might not be a property bubble that is unfolding. Some are even arguing that it can't be a bubble because it's only a shortage of supply - which makes as much sense as "get a better job". Post-hoc arguments like that don't really count as analysis.

The cycle of blame in the media has gone into overdrive as foreign investors who have bought up the top end of town are blamed, as well as negative gearing and the relative lack of supply, record low interest rates, and the notion that property never goes down. One imagines there are any number of journalists who will never get into the Sydney housing market with their straight up journalist's salary. But they're all barking up the wrong tree. Is there a bubble? Yes. Did it start yesterday? That would depend on what you mean by 'start' and 'yesterday'. I can assure you the phenomenon didn't manifest itself out of the blue, out of seeming nothing.

The point is, when too much money chases too few assets, that's the definition for inflation. In the past when inflation reared its ugly head, central banks would raise interest rates to calm down prices. This was how the inflation component of Stagflation of the late 1970s and early 1980s was tamed in America by Paul Volcker, and is the very mechanism by which we understand "the recession we had to have" in the early 1990s in Australia when interest rates soared to 17.5%. Those were some heady days!

Since then, our central banks and governments have indulged in a few naughty practices and it comes down to this: They've been screwing with the way inflation is measured in such a way as to under-report it. They've been doing it for some time, and to such an extent that inflation looked markedly lower than the Australian Bureau of Statistics' own cost-of-living measures. For a good decade now, we've lived in the condition where inflation has been reported markedly lower than the cost of living.

Simply put, the RBA is setting interest rates too low because it's measuring inflation incorrectly. Why does it do so? Because it gets rewarded easier that way, by lowering the hurdle just a bit each time. And because it's setting it too low, there's a property bubble going on; and because it's measuring it incorrectly, it took until this quarter for both Treasury and the RBA to come out and say there's a bubble.

Seriously folks, if inflation is reported lower, it gives licence to central banks to ease monetary policy rather than tighten it. By underreporting inflation for so long, there has been a cumulative easing of monetary policy to such an extent that we're now at 2% interest rate as a property bubble rages on. There's simply too much money chasing too few assets, but the RBA won't pull back from easing because it's believing its own inflation figures. Meanwhile, the general populace who have inelastic economic needs - food, clothing shelter, power & telco - have faced a rising cost of living for so long that they hardly have the disposable income to keep consuming. Private debt has reached incredible highs in Australia, as it has in other anglophone countries, and it's stopping people spending the way the RBA thinks it should. Adding more credit and easy money to the mix isn't going to work.

So what should they be doing? The answer is pretty simple.
The RBA needs to dust off the old way of calculating inflation used back in the 1980s, and figure out just how much they've under-reported inflation over the years; then they need to jack up interest rates just like they did in the early 1990s, to convincingly take away the punchbowl. But without doing so, they're letting all the easy money take up zombie positions in the economy and there will never be a return to strong growth. And at the end of the day, strong growth is their mandate.

Inflation Indexing Is A Scam

The Government Has Been Lying All Along

Have you ever wondered how certain prices of things keep going up but you look at the CPI as posted by the government and it says something like 3%, and you wonder, what's deflating in price to compensate for the 10% rise you saw in the prices of say, everyday groceries? I have. If there's one thing that hasn't made any sense at all, it's been the inflation reports on things that people buy the most - food and rent.

Here's an article in the SMH that basically confirmed my worst suspicions about the Government.

In the 1980s, the World Bank and the International Monetary Fund (IMF) put pressure on governments in the developed world to rein in inflation and labor costs. These governments had - and continue to have - huge unfunded future pension and healthcare costs which cloud their economic future.

They were encouraged in the early 1990s to bring in a new form of CPI that ensured reported inflation remained within a tightly targeted range of 2%-3%.

This included Paul Keating's Australia. The new index would not be a CPI - which simply measured changes in prices - but rather a National Affordability Index which measured how well all households collectively could afford goods.

Inflation had historically been overstated, contended the IMF, and contained an ''upside'' bias thanks to a number of factors: principally the qualitative improvements in goods and the ''narrow'' income base (that is, wages and salaries) upon which changes were measured. It was not broad enough, supposedly.

The case for qualitative improvement in goods was that the latest model TV may well cost more than an older one, but it had greater functionality.

Under the new measure, the two could not be compared without making an adjustment. A notional historical value for the new TV had to be determined - and here began the mathematical gymnastics - and then converted into an effective net present dollar value which was then compared against the old price of TVs.

According to the ''narrow'' income base argument, rather than just using wage and salary income purchasing power, all households' incomes should be calculated when measuring the economy's purchasing power.

This seems simple enough.

In practice, however, the top 15% of tax payers pay nearly 50% of our income taxes and this same group represents more than 60% of all consumer consumption in our economy.

By including all of this additional purchasing power when calculating the new ''average national affordability index'' you end up with some significant distortions, or ''downward bias''.

Urged on by the IMF, a rash of world governments adopted this new framework in the late 1990s within a matter of months of each other. All G20 nations now use it. They did this so they could start reaping the economic benefits.

*Ugh*. I do begroan with all! The top 15% of tax payers determining 60% of consumer expenditure pattern has to be one of the biggest skews in a statistical analysis of pricing. It means it includes price fluctuations of things like a 7 series BMW or a Rolls Royce in amongst the prices of staples such as poultry or bread or vegetables.

To make things more clear, check out this section:

As an example of how removed from reality the ABS calculations and assumptions can be, imagine that a loaf of bread costs $5 and you buy four loaves a week. If it cost $3 previously, you would be worse off to the tune of $8 a week. The ABS, however, might argue that you are in fact better off and that inflation has fallen.

The ABS could assume under their new calculations that, at $5 a loaf, we would only buy three loaves a week instead of four loaves thereby saving $5.

This is known as a quantative assumption. Quantative assumptions, though, are based on consumption trend data that is 12- to 18-months old.

Further, the ABS may assume that another less-price-inflated item is substituted for another loaf saving you another $2.

The problem, as you can see, is that we are talking about a loaf of bread here, a staple product, not a plasma TV set.

This is called a ``substitution assumption'' and it is based on an arbitrary estimate, or guess. (The ABS would prefer to call it a well constructed and tested mathematical model based on real world data. and so forth).

This can have a profound effect on what is known as the basket of goods (the set of basic groceries that the ABS uses to determine food price movements) and an equally profound effect on the final new CPI number.

''The ABS is basically free to play around with what is in the basket until they can model the right number,'' says Beavan.

Further, the average net household income has been driven up by the explosion in executive and upper-echelon pay packets, so you could say that multi-million dollar CEO bonuses drive up the national average income, meaning there is more money available to pay for goods so the goods are now more affordable - although the local pre-school and the average pensioner has not seen a cent.

*Ugh*. You wonder why we don't take to the streets with pick axes. It's because we have mortgages - I don't, but most of the self-respecting population does. But when they do get kicked out of their situation, they might invest in some pitchforks and torches and go witch-hunting for the idiots who came up with this indexing system.