There's little in the basket for grocery relief

GOOD economic news arriving on the doorsteps of Australian homes has been scant in recent months. Yesterday the reports, if not bringing tidings of great joy, equally did not deliver dire outlooks for the rest of the year.

The first news is in the negative. The Reserve Bank did not increase the cash rate of 7.25%, the indicator from which banks then raise interest rates. After 12 rate rises from May, 2002 (when it was 4.25%), this is a welcome pause. The last rate fall was December 2001. However, mortgage holders this year have had to contend with a new factor in meeting their financial obligations because of the fallout from the subprime crisis in the United States. In the ensuing credit crunch, banks have been raising interest rates independently of the Reserve, and adding to household stress.

The Reserve's motivation in aggressively raising rates has been clear; it has to keep a lid on inflation, which is travelling at an underlying rate of 4.3%. The bank's comfort zone is 2% to 3%. To not contain inflation would imperil the economy. Last month, the Reserve's Governor, Glenn Stevens, warned that if inflation were to settle permanently above that comfort zone then high interest rates would not look unusually high. In fact, they would "look pretty common". As it is, the bank does not expect inflation to fall below 3% until 2010.

Two factors overwhelmingly have been stoking inflation: fuel and food. Everyone who has wheeled a trolley down a supermarket aisle will have noticed the steep rise in grocery prices, not just in luxury items, but in basic commodities such as bread, milk and cereal. One of the promises on which the Labor Party came to power at last year's federal election was that it would initiate an inquiry into grocery prices. Given that about 12% of a household's budget goes on groceries, this was sound politics.

The Australian Competition and Consumer Commission yesterday released its report from that six-month inquiry. The report is hardly revolutionary in its recommendations, and, it must be said, conservative to a fault in its findings. The present system - whereby Coles and Woolworths account for about 70% of packaged grocery sales and about 50% of fresh food, and whereby the two companies have 30% of supermarkets of more than 1000 square metres, and 87% of stores larger than 2000 square metres is "workably competitive". The commission concedes that industry upstart Aldi had made a "dynamic impact". However, if this type of dominance is labelled "workable", what impetus can there be for the Government to restructure the industry to allow more competition from other players, which theoretically should lower prices?

The ACCC concludes that higher shelf prices are not the fault of the supermarkets, but of supply and demand in foreign and domestic markets, higher production costs and domestic weather conditions, that is drought and, more infrequently, floods or storms. The commission also found nothing wrong with the supply chain from the farm gate to the supermarket. Indeed, there was no evidence that retail prices had risen while the price paid at the farm gate had stagnated. In its assessment, about 5% of the increase in food prices in the past five years could be attributed to increased margins by Coles or Woolworths. This being so, then prima facie, consumers are at the mercy of factors beyond anyone's control, much like the rise and fall and rise of petrol prices.

The commission is critical of the special arrangements of some supermarket operators that build into their leases in shopping centres a clause preventing competition from another operator, in effect, establishing a monopoly. This is an area that should be examined closely by planning authorities. However, opening up planning to accommodate more competition, as the report suggests, must take into account other planning needs such as an area's amenity.

In reality, given that these recommendations are now to be considered by the Government, very little is going to change in the foreseeable future. There are two exceptions. From today, a new website will be operating, entitled grocerychoice, on which price comparisons will be listed of grocery items, region by region. The second, which could be implemented fairly rapidly, is the introduction of a mandatory unit pricing regime by which each grocery item is displayed by unit of measure, for instance by litre or kilogram.

Given the dramatic braking of the economy, any relief for struggling households - or as politicians like to call them, "working families" - should be a top-shelf priority.