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What cost of living pressure?

Cost of living increases are at a historic low, but you're highly unlikely to hear a politician say so
People feel the cost of living is inceasing when electricity prices have increased markedly in the past 12 months
Rising electricity prices make it feel as though overall cost of living has increased. Photograph: Alamy

The one issue all political parties always agree on is that cost of living is something we need to be concerned about.

When Kevin Rudd announced that he was scrapping the fixed price for carbon and moving to a floating rate, rather than talk of it as an environment policy, he defined it in terms of “cost of living”. He said: “The government has decided to terminate the carbon tax to help cost of living pressures for families and to reduce costs for small business.”

The Liberal party’s policy pamphlet Real Solutions does much the same thing, referring throughout to “cost of living pressures” – especially with regards to electricity and gas prices as a result of the carbon tax.

No politician is ever able to suggest that these pressures are not real, nor that they are even getting better, for fear of being labelled as “out of touch”. The problem, however, is that the latest data from the ABS shows that increases in cost of living for most households are as low as they have been in the past 20 years (outside of the GFC).

While the usual CPI inflation figures treat everyone as part of the same average type of household, the ABS’s Cost of Living Indices measure inflation according to how it is felt by four household types: employee households, age pensioner households, other government transfer recipient households and self-funded retiree households. The cost of living index also counts things not included in the CPI figure – most importantly the interest rate paid on mortgages.

Quite often you hear people say that the CPI is not reflective of the real-world impact of price rises. The cost of living index tries to overcome these concerns. But what it often highlights is that the CPI is actually a pretty good overall measure,

For households with employees (around 70% of all households), the current annual rise in cost of living is actually lower than CPI. Moreover, at 1.4% it’s well below anything seen in the past decade other than during the GFC:

Annual cost of living growth: employee households
Annual cost of living growth: employee households Photograph: /ABS

For aged-pensioner households, the increase in cost of living is slightly higher than CPI:

Annual cost of living growth: age-pensioner households
Annual cost of living growth: age-pensioner households Photograph: /ABS

This is not surprising. Employee households are more likely to have a mortgage and thus they benefit more from falling interest rates than do pensioners who have paid off their home loan.

But for all household groups the increase in cost of living is currently lower than it was at the last election.

Annual growth in cost of living
Annual growth in cost of living Photograph: /ABS

So if cost of living is actually rising slower than in the past, why does it remain such a hot-button issue?

Part of the reason is that while overall inflation is low, electricity prices increased markedly in the past 12 months due to the carbon price and network costs (both were roughly responsible for half of the average 17% increase). Electricity and other utilities now only account for around 3.6% of households’ total expenditure each year, but unlike the amount spent on alcohol for example (on average 4.75% of households’ annual expenditure), electricity prices come in a big bill and are also not a luxury item.

So to an extent it is understandable why people feel that cost of living is growing faster than ever because the big bills you notice are going up faster than the small bills which you don’t notice so much.

But cost of living isn’t just about prices. When times are good you worry about keeping up with inflation, when times are poor the reason you worry about being able to pay for things is due to declining income – whether due to loss of a job or a cut in hours of work.

The current cost of living concern is also abetted by the changes in the economy since the GFC. This was mentioned again in a speech by the Reserve Bank governor, Glenn Stevens, on Tuesday when he noted that “the value of non-financial assets in particular – mainly dwellings – is lower today in real per person terms than it was five years ago”.

Although increasing housing prices actually raise the cost of living they also increase household wealth. Thus conversely a slow growth in housing prices reduces the actual cost of living, and also serves to make people feel like their wealth is not growing as fast it was – and thus the sense that prices are increasing faster than is their wealth.

So “cost of living pressure” morphs into whatever context is appropriate for the time – inflation, job security, reduced assets prices, declining wealth.

It’s why those waiting for politicians to stop wheeling out the phrase will wait in vain. But given the latest data shows that the actual increase in cost of living is historically low, the debate might benefit from calling things for what they are. It would also be good if politicians could state facts without being branded as out of touch.

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