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



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

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 in What Are We Complaining About?. 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.

Download What Are We Complaining About?

Over recent times it has become conventional wisdom, at least in sections of the media and among some politicians, that Australian households are ‘doing it tough’ because of cost-of-living pressures.

What Are We Complaining About? Highlights possible explanations for this perception are:

1. It may be correct. Perhaps incomes have not risen in line with the cost of living, either as a whole or for some groups. There is an argument that the consumer price index (the CPI) is being kept in check
by low prices and price falls for many discretionary items such as electronic goods, appliances and travel, which are masking strong rises in non-discretionary items such as food and electricity;

2. Maybe expectations of what constitutes a reasonable standard of living have risen faster than real incomes;

3. Possibly some prominent items of expenditure, such as electricity, have captured attention disproportionate to their actual effect on the overall cost of living.