Australia's 'cost of living pressures' look like a myth

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The cost of living in Australia is soaring. Wages are growing at the slowest pace since the 1990’s recession, unemployment, particularly underemployment, is elevated, while house prices continue to screech higher. It’s becoming all too hard to make ends meet.

Unless you’ve been living under a rock, you’ve probably heard all of those arguments, perhaps more, in recent years.

However, is it really true that the cost of living in Australia is out of control?

According to the Australian Bureau of Statistics’ (ABS) living cost index (LCI), a publication released every quarter, the answer is almost certainly no.

In the three months to June, the cost of living rose by 0.3% to 0.5% depending on your household type, around the same level as the separate consumer price index (CPI) which increased by 0.4% over the same period.

From a year earlier, living pressures were close to non-existent, rising by between 0.7% to 1.1% compared to the same quarter in 2015.

Not much at all, and well below the increases seen in previous years, shown in the chart below.

Now, I can hear you asking the question: what is the LCI, and how is it different to CPI? The ABS suggests it should answer the following question:

By how much would after tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in the base period?

The ABS created the index as it believes that CPI is not a conceptually ideal measure for assessing the changes in the purchasing power of the disposable incomes of households.

“A living cost index reflects changes over time in the purchasing power of the after-tax incomes of households,” says the ABS.

“It measures the impact of changes in prices on the out-of-pocket expenses incurred by households to gain access to a fixed basket of consumer goods and services.”

Essentially, the CPI measures changes in a basket of goods and services consumed by households. The LCI, on the other hand, tracks those movements against fluctuations in household disposable income levels.

As for the household types, it’s fairly self explanatory. Employee households are those whose main source of income is from wages and salaries, while the primary source of income for age pensioner households is from the government pension. Self-funded retiree households are those those whose principal source of income is derived from superannuation or property income.

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