What Are We Complaining About? An Analysis of Cost of Living Pressures

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Are most Australians really ‘doing it tough’?

In response to the widely-held notion that we are all suffering from cost of living pressures, CPD fellow Ian McAuley undertakes a thorough review of the evidence. McAuley finds that, in fact, rising incomes have kept well ahead of rising prices for the majority of Australians. Some people are feeling a squeeze: renters and people who rely on government benefits other than the age pension have seen their living costs rise faster than their incomes:

  • From 2003-04 to 2009-10, rents rose by 41 per cent in today’s dollars.
  • While age pensions are linked to average earnings, some other benefits are linked to the official inflation figures (Consumer Price Index). Costs have been going up by 3.7% a year for these people, while incomes have only been going up by 3.0% a year.

For most Australians, the paper finds that ‘expectation inflation’ is a much more likely explanation for perceived cost of living pressures.

Some people are possibly feeling poorer because house prices have stopped rising. This is the flip side of the illusion of ‘wealth’ associated with the strong rise in house prices from 1995 until 2009.

Some household bills, such as electricity, attract particular attention. Even though electricity takes only around two percent of our income, electricity bills can come as a nasty shock, particularly if there is some combination of higher usage and a price rise.

Research in consumer behaviour finds that we are far more attentive to price rises than price falls. While we are very conscious of price rises for items such as bananas and school fees, we are less aware of price falls, such as those which have occurred in clothing, telecommunications and domestic appliances.

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