Tuesday, February 15, 2011

The CPI does not measure changes in the cost of living

False advertising from Centrelink
Cost of living:

Working families +4.5%
Age pensioners +3.1%
Welfare beneficiaries +4.5%
Self-funded retirees +2.6%

Consumer price index: +2.7%

If you think your cost of living is rising faster than the consumer price index, you're probably right.

Living cost indexes released yesterday by the Bureau of Statistics show the increases facing working families, age pension households and welfare beneficiaries have all outpaced the CPI.

Working households faced extra costs of 4.5 per cent in the year to December, aged pensioners 3.1 per cent and welfare recipients 4.5 per cent. The CPI itself grew 2.7 per cent.

The Bureau says there are different reasons for each group. Aged pensioners spend a relatively high proportion of their income on utility bills and fruit and vegetables, both of which shot up in price in the year to December.

As a group, welfare beneficiaries spend a higher proportion than most on alcohol and tobacco, which increased sharply in price largely as a result of the 25 per cent increase in cigarette tax.

Working families are highly likely to face mortgage payments... which jumped in price an extraordinary 30 per cent over the year as a result of four Reserve Bank rate hikes and one imposed by the banks themselves. Mortgage increases feed directly into the living cost indexes calculated by the Bureau but not into the consumer price index itself.

Self funded retirees did alright though. The Bureau says their living costs climbed just 2.6 per cent, a point lower than the CPI. They are unlikely to face too much pain from rising interest rates.

Does this mean the consumer price index is a poor guide to living costs? The Bureau says it does. It is meant to be a measure of inflation rather than living costs, a subtly different concept which is why the Bureau produces separate living cost indicies.

The good news for pensioners is they get a choice. Their payments are adjusted twice a year in line with either the CPI, the pensioner living cost index or male total average earnings, whichever has increased the fastest.

The unemployed get no such luck. Their Newstart allowance gets adjusted only in line with what is usually the lowest of those, the CPI, which the Centrelink website wrongly describes as a measure of changes in the cost of living.

So fast is Newstart shrinking relative to other benefits as a result of the difference it is now worth just two-thirds of the pension and is projected by Treasury to shrink to one-third by 2050.

"Right now, someone on Newstart is living on $33 a day," said Australian Council of Social Service President chief executive Cassandra Goldie. In its budget submission ACOSS asks for NewStart to be boosted $50 per week as recommended by both the Henry Tax Review and the Organisation for Economic Co-operation and Development.

Tighter family budgets and greater caution were evident in credit card figures released yesterday which showed the average balance up just 1.9 per cent on the previous December, a result in line with retail spending figures which went backwards in real terms.

Housing finance figures were brighter with borrowing for owner occupation up 2.3 per cent in December despite the interest rate rises in what is the sixth consecutive increase.

NSW and Victoria are leading the pack with trend increases in the number of owner occupied loans of 2.1 and 1.4 per cent per month.

"Softer prices are attracting buyers," said CommSec economist Craig James. "The average mortgage size has climbed only 0.3 per cent over the past year, the slowest growth rate in almost 10 years."

Reflecting greater caution the proportion of new home loans borrowed at fixed rates doubled from 3.4 per cent to 8.9 per cent between August and December.

Published in today's SMH and Age

Why unemployment benefits need to be increased - Peter Whitford, Inside Story

Peter talking to Fairfax Media this morning

Related Posts

. NewStart is $231 and shrinking relative to other benefits.

. Could you live on $32 a day?

. Up, up and away? For some....

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