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