Lucky country becomes the land of eye-watering prices

Australians may be surprised that Londoners and New Yorkers often pay less, writes Ruth Williams.

When mental health researcher Laura Dainton Smith, 28, moved back to Australia last year after 12 months in the United States, she was jolted by the prices of daily essentials such as clothes and food.

It wasn't so much that the prices in Australia had gone up much in the year she and partner Will spent living in Massachusetts. It was more that they'd become used to the cheaper prices in the US - and paying so much extra for the same items hurt.

"Clothes, food, alcohol, make-up, it's often half the price over there," Dainton Smith says. "We have to plan and budget a lot more carefully to be able to have the things that we could take for granted in the US."

This week, a Deutsche Bank report illustrated what many suspect - whether catching public transport, ordering a beer or buying medicine to battle the common cold, Australians pay among the highest prices on the planet.

The report, which tracks the prices of an array of goods and services in cities and countries around the world, found that Melburnians and Sydneysiders pay almost 40 per cent more for cinema tickets than Manhattanites and Parisians, for example, with cinephiles in Wellington and London paying only slightly more.

Pick up a two-litre bottle of Coke at a supermarket in Melbourne or Sydney and you'll pay almost 50 per cent more for the sugar and caffeine concoction than in Berlin or Auckland. Planning on ordering your mother a bunch of roses for Mother's Day? That will cost you about $US139, more than in any of 16 other countries surveyed.

The Deutsche report uses prices in New York as a baseline, and converts all prices back to US dollars. It echoes the findings of the Economist Intelligence Unit's annual Worldwide Cost of Living survey, which recently ranked Sydney and Melbourne as the third and equal fourth most expensive cities to live.

Ten years ago, not one Australian city was ranked in the top 10.

It's a stark demonstration that eight years since the mining boom took off, and more than two years since the Australian dollar breached parity with the greenback, Australia has become one of the most expensive places in the world.

Or, in the words of Choice chief executive Alan Kirkland, it "shines a bright light on how much we are being fleeced".

Ask why Australians pay so much more, and the answers vary depending on the item - and the person answering the question. For example, Australia's high taxes on tobacco help explain why a cigarette in Australia costs more than in 27 other countries - $US17.22 for a pack of Marlboro compared with $US1.10 in Manila, Deutsche says.

The cost of a pint of beer in Australia is the third highest among 17 countries, Deutsche calculates. According to the Australian Hotels Association, taxes make up about about 20 per cent of the cost of a beer served in a pub.

But while alcohol and tobacco attract higher taxes, Australia has low import tariffs compared with Europe and the US, making it "hard to know" why imported goods are so much more expensive, says economist Stephen Koukoulas.

Koukoulas, managing director of Market Economics, suspects the cost of transporting items to and around Australia may still be a factor in price differences.

But Choice believes many companies charge more for products in Australia simply because they can.

"It is about marketers deciding what is the highest price they can charge," Kirkland says. "Australians have historically paid more for a whole range of goods ... but in many cases when you put it to the test the increased cost of selling in Australia just didn't hold up any more."

The Deutsche Bank report says Australians pay 26 per cent more for an iPhone than US consumers, and 13 per cent more for an Apple Macbook. Choice has been campaigning against price discrimination in IT products and services, the subject of a parliamentary inquiry.

The good news is that even if they pay more than consumers in other countries, Australians are paying less than they used to for imported items such as clothing, shoes and cars.

Australia is now the equal third-cheapest of 17 countries in which to buy a pair of adidas sports shoes, Deutsche Bank found, with the price having dropped more than $US5 in 12 months. A pair of Levi's jeans in Melbourne may cost almost twice as much as the same pair bought in New York, but cost more in Paris, Hong Kong and London.

The high dollar has increased Australians' buying power, and competition from online shopping has helped force down prices of products such as make-up and clothes.

This week's consumer price index data found that the prices of tradeable goods - such as pharmaceuticals, vegetables and tobacco - fell 1.2 per cent in the March quarter.

But the figures also showed that the cost of non-tradeables such as restaurant meals, shoe repairs or education rose 1.3 per cent. The Deutsche research confirms that many of things that cost a lot more in Australia - such as hotel rooms, a flower delivery or a beer in a pub - involve labour, reflecting Australia's high wages.

Chris Morris, whose Colonial Leisure Group owns a portfolio of Australian pubs and restaurants and a conference and wedding venue in Dorset, England, says labour costs are a big factor in inflating the price of a beer in Australia. He warns of the impact of penalty rates and high wages on the competitiveness of tourism and hospitality, which struggle to convince Australians to spend their mighty dollars at home.

"People come and say 'what? Ten dollars for a pint of beer!' It's £3 in the UK"', says Morris, who estimates Australian labour would cost, on average, three times more than in Britain.

But Australia's higher wages mean that, in many cases, Australians can actually afford to pay the higher prices, Koukoulas says.

Wages in Australia are about 50 per cent higher than in the US or New Zealand, and average weekly earnings have risen roughly 3.5 per cent a year for the past five years. Australian wages have outstripped inflation for more than a decade.

"[It costs more here] to pay a person to sit in a retail shop or to operate a website or to distribute an item. A high-income, high-cost country shows up in the prices that we pay," Koukoulas says. "If you want to pay the same as what Americans are paying, then accept American wages. You can't have the low prices without the low incomes."

Saul Eslake, chief economist at Bank of America Merrill Lynch Australia, says the Deutsche report would have been more useful had it compared prices of items as a proportion of earnings in each country. This would show how affordable or expensive each item was for a person earning the local currency.

But he says the report should serve as a reminder of the challenges facing the economy - including, crucially, how it will compete against lower-cost countries.

Australia may have high wages "but that doesn't lead me to say that the answer is to cut wages", Eslake says. "If this relatively high wage structure is to be sustained, without adverse consequences for employment, we need to boost productivity."