CPI And Cost Of Living Discrepancy

What To Make Of This

Just what good is the CPI - the 'Consumer Price Index - as a measure of inflation when the cost of living surges ahead of the CPI? This is the question in this article here.

Soaring food and rent costs have seen the cost of living outpace inflation over the past year, adding to evidence that households are being squeezed, new figures show.

"Employee" households saw their cost of living shoot up 4.5 per cent in the year to June, driven by soaring increases in the cost for food, alcohol and rent, the Australian Bureau of Statistics said.

The ABS said those rises were "due to increases in mortgage interest charges, fruit, automotive fuel, tobacco, electricity and rents".

The increase surpassed the 3.7 per cent rise in headline inflation over the year to June and comes as rising costs - combined with high debt levels for housing - have been blamed for Australia's slowing economy. The Reserve Bank uses its own underlying gauges of inflation based on data supplied by the ABS when deciding interest rates.

Food costs for employee households increased 5.8 per cent over the year, the ABS said, while alcohol and tobacco prices rose 5.6 per cent in that time. Housing costs, which exclude real estate purchases, increased 5.8 per cent for employee households in the year.

Now, that actually does fall in line with my own experiences of late. That is to say, the day to day things the form the inelastic end of my needs have been creeping up in price, while the things I have a fair bit of elasticity in have been falling in price. So if the CPI is measuring a wider spectrum of goods and it is coming in lower than the cost of living figures, then that indicates there's a bit of deflation going on at the bigger ticket end of the spectrum.

It's hard to say just how much we should be encouraged by the prices of computers today compared to even 5 years ago, but there does seem to be a trend for the bigger ticket items to be sitting cheaper than they did before. It is taking some stupidly obstinate pricing practices in the retail sector to keep the pricing at the same level as before we hit 95cents and above against the US Dollar. Most of anything imported has come down in price.

One imagines it benefits the government coffers greatly for things to be indexed to CPI rather than cost of living; especially things like pension and welfare payments, but that's basically the government making savings in a way that doesn't show up as a cut in the budget. Similarly, the mortgagees benefit greatly because it tempers the degree by which the RBA raises the interest rates. So it's a kind of passive transfer of wealth from the poor to the middle. Though saying that too loudly will get you labelled a crazy Marxist - or a gloating fascist.