The claim
Ahead of the May budget, Shadow Treasurer Angus Taylor argued for spending restraint from the government in the face of the rising cost of living.
"We've got the worst inflation — core inflation — in the G7," he told host David Speers on ABC TV's Insiders program.
"It's above the US, it's above the UK, Canada, Europe," he said.
Does Australia have core inflation that is worse than all the countries in the G7?
RMIT ABC Fact Check investigates.
The verdict
Mr Taylor's claim checks out.
Core inflation is a measure of consumer prices that removes food and energy price increases from the equation.
Data published by the Organisation for Economic Cooperation and Development (OECD) puts Australia's core inflation at 6.6 per cent for the year to March 2023.
Meanwhile, figures for G7 nations and the 19 Eurozone countries ranged between 5.8 per cent for Germany and 2.4 per cent (Japan).
Latest figures for the 27 countries of the European Union (EU), for the December 2022 quarter, showed a 4.7 per cent increase, while Australia recorded a 5.5 per cent increase for the same period.
Experts cited increased energy prices flowing through to other spending categories and a strong and resilient demand-side of the Australian economy as reasons core inflation might be elevated relative to that of G7 countries.
Whether or not this is a good argument for spending restraint is a separate question, and not the subject of this fact check.
What is core inflation as distinct from headline inflation?
The Reserve Bank of Australia defines inflation as "an increase in the level of prices of the goods and services that households typically buy".
"A powerful lesson from history is that low and stable inflation is a prerequisite for a strong economy and sustained full employment and growth in real wages," the central bank says in its inflation overview.
The Australian Bureau of Statistics (ABS) publishes the Consumer Price Index (CPI), which "measures quarterly changes in the price of a 'basket' of goods and services which account for a high proportion of expenditure by the CPI population group (i.e. metropolitan households)".
The rate of change in that index over a period of time is referred to as the inflation rate.
The figure which is typically reported when new quarterly figures are released by the bureau is often referred to as "headline inflation". In March 2023, for example, headline inflation over the previous 12 months was measured at 7 per cent.
But there are other measures of inflation that economists consider when assessing price rises in an economy. One of those is so-called "core inflation".
"Core inflation is the change in the consumer price index excluding food and energy items," explained Fabrizio Carmgnani, dean of the Griffith Business School.
"This is a pretty standard definition, and I would say it is accepted worldwide," he said.
Other economists contacted by Fact Check held the same view.
"Core inflation excludes from the calculation food and energy prices," said Alberto Posso, a professor of economics in RMIT University's School of Economics, Finance and Marketing.
"It is considered a really good measure because the latter can be very volatile. However, food and energy consumption make up a lot of a household's budget, so, in reality, we should always be looking at both measures to paint a more complete picture."
Timo Henckell, an economics senior lecturer and research fellow in the Centre for Applied Macroeconomic Analysis at Australian National University, said core inflation was meant to "capture the long-run trend in the price level, disregarding any short-term, transitory price changes".
He noted that generally, but not always, changes in food and energy prices were transitory.
"So, historically, the most common way to generate a measure of core inflation is to simply take the standard ("headline") consumer price index and take out food and energy prices," he told Fact Check in an email.
What is the G7?
In making his claim, Mr Taylor compared Australia to the G7.
The G7 — or Group of Seven — refers to an international forum of seven leading industrialised nations plus the European Union which "[share] fundamental values such as freedom, democracy and human rights" and are some of the world's biggest economies.
Member states include the US, UK, Japan, Canada, France, Germany and Italy.
The claim also appeared in an opinion piece Mr Taylor wrote for the Australian Financial Review: "Fast-forward to 2023 and Australia has one of the highest rates of core inflation among major economies. At 6.6 per cent, Australia's core inflation is higher than the UK (6.2 per cent), the US (5.6 per cent), Canada (4.3 per cent) and the Euro Area (5.7 per cent)."
Mr Taylor also made the same claim in an interview with ABC News Breakfast on May 4, noting: "6.6 per cent core inflation; that's higher than the US, the UK, Canada, Europe and the whole of the G7."
While Australia is not in the G7, Mr Taylor has used G7 countries as a benchmark; thus, Fact Check has assessed his claim on that basis.
What data is out there?
Experts pointed Fact Check to the OECD for internationally comparable core inflation figures.
The organisation publishes a core inflation series (which excludes food and energy prices) for OECD member states and selected other countries, and for blocs of countries such as the EU.
It publishes this data on an annual calendar year basis, as well as on a rolling annual basis by quarter and quarter-on-quarter. The latest quarter available of the first of these is 2022, while for the latter two, data is available for the March 2023 quarter.
The OECD also publishes monthly inflation data for selected countries, not including Australia.
Australia does publish its own monthly inflation figures, the latest edition covering April 2023 and released after Mr Taylor made his claim. However, the measure does not exclude all food and energy from the equation.
Professor Posso told Fact Check that talk of inflation could refer to monthly, quarterly or annual data.
But he said the longer the period examined, the less volatility was likely.
"In a post-recovery period, I would be inclined to look at longer-term averages," he said.
Thus, Fact Check will use annual rolling data in assessing Mr Taylor's claim.
The OECD does not yet have data for March, 2023 for all 27 countries that make up the EU. The latest data point for this group of countries is the December, 2022 quarter.
However, there is data to March, 2023 for the Euro zone, which comprises 20 EU countries.
In assessing Mr Taylor's claim, Fact Check will compare Australia with the Euro zone to March, 2023 and all 27 countries of the EU to December, 2022.
Which country is highest?
Fact Check has charted core inflation according to economies.
At 6.6 per cent, Australia's annual core inflation for the March, 2023 quarter is higher than all G7 economies, even if headline inflation for some of these countries is above that of Australia.
The following graph shows that core inflation has been higher in Australia than in the G7 since the September 2022 quarter.
Germany recorded the highest core inflation in the G7 at 5.8 per cent, followed by the UK, the US and the Euro area (5.6 per cent), Canada (4.9 per cent), Italy (4.7 per cent), France (3.5 per cent) and Japan (2.4 per cent).
It's important to note, however, that although Australia's core inflation is elevated relative to these large economies, it remains below the average for OECD countries (7.2 per cent), which are often used as a proxy for developed economies.
Looking at the 27 countries of the European Union, the December, 2022 quarter figures put core inflation in the bloc at 4.7 per cent, which is below Australia's figure of 5.5 per cent for the same period.
What do the experts say?
Despite the fact that core inflation, by definition, excludes energy prices, Professor Carmagnani told Fact Check that current high energy prices may nevertheless be playing a role in Australia's figure.
"The fact that Australia has higher core inflation than the G7 average might mean that in Australia the impact of the supply-side shock on energy is less acute than in G7," he said.
Professor Henckel said increased energy prices typically did get passed on to consumers, meaning they impact core inflation to some extent.
But he said the more prolonged the energy shock, the less impact it would have as consumers sought cheaper energy sources.
"That is why an increase in the oil prices … in 2023 has much less of an impact on modern economies compared to, say, the time of the first oil price shock of 1973-74. Back then, production was a lot less efficient and more reliant on cheap oil."
Professor Henckel added that Australia was a net energy exporter and that "theoretically, the gas that's produced here could be sold cheaply domestically, below elevated world prices".
"But that's not how the gas industry has been structured."
Professor Carmagnani also pointed to "demand side" factors which might be pushing up both core inflation and headline inflation in Australia.
"[They] might be at the moment more relevant than in several G7 economies, where the economy (and the labour market) is performing less well than here."
Professor Henckel agreed: "Wages growth has remained remarkably muted (at least so far), so that's not a major driver of inflation," he said.
"Consumption spending has held up pretty well, all things considered, and the unemployment rate remains at record lows. So, the demand side of the economy is proving pretty resilient despite 11 interest rate hikes."
Principal researcher: Matt Martino, Managing Editor
Sources
- Angus Taylor, Interview, Insiders, May 7, 2023
- Reserve Bank of Australia, Inflation Overview
- Australian Bureau of Statistics, Consumer Price Index March Quarter 2023, April 26, 2023
- G7 2023 Hiroshima Summit, Q&A, History of the G7
- Angus Taylor, Interview, ABC News Breakfast, May 4, 2023
- Angus Taylor, Chalmers has no more cash to splash, Australian Financial Review, May 2, 2023
- Organisation for Economic Cooperation and Development, Consumer price indices (CPIs) — Complete database
- ABS, Monthly Consumer Price Index Indicator April 2023, May 31, 2023
