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The cost of living is easing. So why doesn't it feel that way? | Greg Jericho

Greg Jericho
It’s probably not much solace to people to be told that cost of living is rising at almost record lows when the cost of essentials is outpacing wage growth. Photograph: Bloomberg/Getty Images

Politicians always know to never suggest cost of living pressures are easing. But the latest figures by the Australian Bureau of Statistics show that for most households the rise in cost of living is at near record lows. But a closer look at the reasons for that low growth shows that the ease is biased towards those with a mortgage and assumes that after paying for necessary items like insurance, child care and council rates you have some money left over to spend on luxuries.

The latest cost of living figures released by the ABS, not surprisingly showed that cost of living continues to rise at extremely low levels.

The cost of living indices break down inflation according to different types of households, reflecting that aged pensioners for example have different spending patterns to those who work.

But across all household types, cost of living growth remains historically low. For employee households, it grew by just 1.1% in 2016, and for aged pensioners by 1.6%:

The biggest rise in cost of living last year was for households of people on non-aged pension government benefits. A major reason for this is that such households are on average more likely to contain smokers, and as I noted last week, tobacco prices are rising well above all other items.

The ABS uses household expenditure data to work out how much on average each type of household spends on items. It estimates that households with those on government welfare payments spend on average 5.83% of their weekly spending on tobacco, compared to just 2.25% by employee households:

But that is an average that takes into account those who smoke and those who don’t. Thus if you are a smoker it is likely you spend much more than just 5.8% of your money on cigarettes – and thus your cost of living grew by more than the average household.

And this goes to the big problem with cost of living figures. While the figures suggest we should all be pretty happy, they are just an average figure that may not reflect our own situation.

And as any politician knows, most people feel that cost of living pressures are immense regardless of what the data says.

Yesterday at the National Press Club, the prime minister noted that, “We keenly understand how many families are just managing right now. The cost of everything seems to be going up much more than wages.”

Of course the issue isn’t that the cost of “everything” seems to be going up, but rather that the cost of things which are essential seems to be so.

A quick look at the price rise of essential items suggests that this vibe is correct – the price rises of essentials have mostly outpaced the rise in wages:

Thus it’s probably not much solace to people to be told that cost of living is rising at almost record lows when the price of utilities (such as gas and electricity), primary school education costs, medical and hospital services, insurance and child care has risen faster than have wages.

When we look at the growth in prices of more luxury items – such as holidays and AV equipment like televisions – we see a much different picture. The prices of many of these items have either fallen in the past year, or risen by less than have wages:

It’s the problem with the averages of both inflation and cost of living indices – they assume regardless of price rises of various items, that household expenditure remains fixed.

The reality is households work differently. If council rates suddenly jump, or electricity prices rise markedly, then households will spend less on other things – such as a holiday.

Take for example the impact of storms on fruit prices. In early 2011 the price of fruit jumped 66% due to Cyclone Yasi, and mostly due to skyrocketing prices for bananas. But most households didn’t see their spending for fruit go up by that much, they instead cut back on bananas and bought other fruit (or less fruit in general):

But even still, we need to be a bit careful about ignoring the overall figures.

While they may not reflect every household’s experience, they do give us a good guide – and one we can compare over previous years.

Sure, there might be some who put off buying a new TV because their electricity costs went up, but people do still keep buying TVs and that the price of them may have fallen should be reflected in the figures.

And because, unlike inflation, the cost of living figures count mortgage payments, they very much show how the pressure of cost of living is much reduced if you own a house:

The ABS estimates that, on average, 11.7% of weekly spending in employee households goes towards mortgage payments. Falls in interest rates greatly affect those households’ cost of living – and sees it currently rising by less than inflation.

Since December 2011, rents have gone up 11.3%, the price of new homes for owner occupiers has risen by 15.2%, while the cost of mortgage payments has fallen by 26.1%.

So while cost of living rises can sometimes be dismissed as not reflecting people’s real lives, they also show very much the real experience of the past five years, which has been very good for those who already own a house, rather than for those trying to buy one.