Tuesday, February 16, 2010

If you thought the consumer price index measured the cost of living...

You were wrong
Consumer Price Index +0.5%

Employee living cost +0.7%
Age pension living cost +0.6%
Self-funded retiree +0.6%
Beneficiary living cost +0.6

December quarter 2009
CPI , Analytical living cost indexes.

Do you reckon your own personal rate of inflation is higher than the official rate of 2.1 per cent?

During the December quarter you were almost certainly right.

The Bureau of Statistics says the official inflation rate in that quarter was just 0.5 per cent. But more detailed so-called analytical living cost indexes released yesterday show that if you were working your living costs were climbing 0.7 per cent, if you were retired and on the pension they were increasing 0.6 per cent, if you were retired and self-funded by 0.6 per cent and on benefits by 0.6 per cent.

That's right. Almost whoever you were, your living costs were climbing faster than the rate of inflation.

It's good news for pensioners, even if it appears to make no sense. Pensions and other benefits get lifted every six months by the larger of the official inflation rate and the pensioner and beneficiary living cost index.

How can each of the published living cost indexes increase by more than the rate of inflation...

The anwer, according to ABS Assistant Director Lee Taylor is that the long-established consumer price index doesn't measure the cost of living.

Instead it measures price movements.

Confused? The big difference is that when it comes to calculating the CPI increases in mortgage rates aren't regarded as price increases. The "price" that is included in the CPI is the margin between what banks pay us for money and what they charge, which may or may not change when mortgage rates increase.

But when it comes to calculating a "cost of living" mortgage rates are very relevant. The Bureau has decided that even if interest charges are not prices they are a cost. The three mortgage rate hikes at the end of last year increased living costs substantially for mortgage holders, and for employed Australians more than other Australians because employed Australians are more likely hold mortgages.

The Bureau's measure of the price of financial and insurance services jumped 2.9 per cent for households with employees in the December quarter and 1.3 per cent for households with age pensioners. The differently-calculated financial and insurance index used in the CPI climbed just 0.7 per cent.

The Bureau has launched an inquiry into the way it calculates the CPI and is seeking submissions on its "relevance" and the way it handles deposits and loans.

Published in today's SMH  and Age

Related Posts

. Do you think the CPI is a joke?

. The living cost index that won't index living costs

. Your own personal what? Inflation rate - seriously


Anonymous said...

Not quite, Peter. Pensions, except for parenting payment for single parents, are indexed to the greater of CPI and the new PBLCI, but benefits (like Newstart allowance) are not. Benefits are CPI only.

Note too that pensions (including parenting payment for single parents) are benchmarked to wages, and (generally) wages growth has been the primary driver of pension rates, not CPI.

- spog

Peter Martin said...


derrida derider said...

The ABS reviews the CPI every five years or so - the new inquiry is a routine one, not a one-off.

The treatment of mortgage costs is always a big issue in these reviews. That different reviews reached different conclusions about this treatment should tell you that the issue is not clearcut - there are good arguments on each side.

Detailed studies of the various living cost indices by the ABS shows that over the past 30 years any diffences between them have always been short-term - in the long run they tend to come out very close to the same result.

chewing my income said...

CPI vs my outgoings: My income is consumed by mortgage payments and over 50% value of the debt was because of the cost of the land. So land component of mortgage is chewing my income. How come that is not included in the CPI? Seems odd.

Anonymous said...

Things are returning to how they were in the 70's and that period of stagflation. cost of living rising faster than "inflation". read: wages.

Back then the height of accomplishment was getting on to some kind of government pension or benefit. When I was small I remember my mother and aunts always talking about how person x, y or z had it easy because they were receiving some kind of disability payments or allowance (which were very hard to get on back then)

It is now heading that way again, except getting on disability is a breeze.

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