Illustration: Simon Letch The crazy thing is the widespread view that our big problem is the rapidly rising cost of living is roughly the opposite of the truth. It's true the price of electricity has been rising rapidly, lately and for many years, for reasons of political failure. But electricity accounts for just a few per cent of the total cost of the many goods and services we buy. And the prices of those other things have been rising surprising slowly, with many prices actually falling. You hadn't noticed? Goes to show how wonky your economic antennae have become. Annual increases in consumer prices have been so low for the past three years that the governor of the Reserve Bank, Dr Philip Lowe, is worried about how he can get inflation up into his target zone of 2 to 3 per cent.

Squeezed and anxious households reduce their spending. Credit:Erin Jonasson Why would anyone worry that the cost of living isn't rising fast enough? Because, though it's hardly a problem in itself, it's a symptom of a problem buried deeper. Which is? Weak growth in wages over the past four years. Rising wages are the main cause of rising prices. Price rises have been small because wage rises have been small. For some years now, the rate of increase in food prices has been unusually low. Credit:Jim Rice It's the weak growth in wages that's giving people trouble balancing their household budgets – a problem they mistakenly attribute to a fast-rising cost of living.

What they've grown used to over many years is wages rising by a per cent or so each year faster than prices, and they've unconsciously built that expectation into their spending habits. When it doesn't happen, they feel the pinch. Competition has helped food shoppers. Credit:Nick Moir For the past four years, wages have barely kept pace with the weak – about 2 per cent a year – rise in consumer prices. This absence of "real" wage growth is a problem for age pensioners as well as workers because pensions are indexed to average weekly earnings – meaning they too usually rise each year by a per cent or so faster than prices. Why would any economist worry that wages weren't growing fast enough? Because, as well as being a cost to business, wages are the greatest source of income for Australia's 9.2 million households.

And when the growth in household income is weak, so is the growth in the greatest contributor to the economy's overall growth: consumer spending. It might seem good for business profits in the short-term, but weak wage growth eventually is a recipe for weak consumption and weak growth in employment. What sounded like a great idea at first, ends up biting business in the bum. Weak wage and price growth is a problem in most rich countries at present, meaning it's probably explained by worldwide factors such as globalisation and technological change. In a speech last week, Lowe opined that a big part of the problem was "perceptions of increased competition" by both workers and businesses. "Many workers feel there is more competition out there, sometimes from workers and sometimes because of advances in technology" and this, together with changes in the nature of work and bargaining arrangements, "mean that many workers feel like they have less bargaining power than they once did".

"It is likely that there is also something happening on the firms' side as well . . . Businesses are not bidding up wages in the way they might once have. This is partly because business, too, feels the pressure of increased competition." Lowe says a good example of this process is increased competition in retailing, where competition from new entrants (Aldi, for instance) is putting pressure on margins and forcing existing retailers to find ways to lower their cost structures. Technology is helping them do this, including by automating processes and streamlining logistics (transport costs). The result is lower prices. "For some years now, the rate of increase in food prices has been unusually low. A large part of the story here is increased competition. The same story is playing out in other parts of retailing. Over recent times, the prices of many consumer goods – including clothing, furniture and household appliances – have been falling," Lowe says.