More evidence that standards are slipping, and the living is not so easy | Greg Jericho | Business

The latest cost of living figures, released yesterday by the Australian Bureau of Statistics, reveal that while inflation might be just at the bottom of the Reserve Bank’s target range, the cost of living for most families is rising faster than are wages. With interest rates no longer falling and the cost of petrol rising sharply, in the past 12 months the average working household has seen its standard of living fall.

Every three months, in the week after the consumer price index figures are released, the ABS produces its cost of living indices. Whereas CPI aims to paint a picture for the average Australian household, the cost of living figures break households into different types, dependent upon their income.

Thus, there are cost of living figures for employee, age pensioner and self-funded retiree households, and for those whose main source of income is from non-age pension government benefits.

Not surprisingly, different households on average divide their spending rather differently.

Pensioners, for example, spend more of their weekly income on food and health than employee households, but less on alcohol and transport. The average household dependent upon government benefits, however, spends a lot more on tobacco than do all others:

So, when the cost of an item – which a household spends more on than the average included in the CPI figures – rises by more than average, that household’s cost of living will likely rise by more than overall inflation.

In the past quarter the households that have seen the biggest increase in cost of living are employee households and self-funded retirees. But over the past year the biggest increase in burden has been for government beneficiary households and employees.

While the CPI rose by 2.1% over the past year, the cost of living for employee households rose by 2.3% while for government beneficiary households it rose by 2.7%:

Given that in the 12 months to March private sector wages grew by just 1.9%, unless there has been a very big surge in wages in April, May and June, it means that the standard of living for workers went backwards in the 2017-18 financial year.

The reason is not that wages growth is slowing, but that for most households the cost of living is rising faster than it was one or two years ago, and the increase has been most pronounced for employee households:

A major reason for the increase in cost of living for government beneficiary households is their general tendency to smoke more than the average household. As I noted last week, the inflation data showed that the increase in tobacco excise was producing an annual inflation figure that was 0.4% points higher than if we excluded alcohol and tobacco.

For such households the rise in alcohol and tobacco has contributed to nearly half of the rise in their cost of living since September last year, with the other big driver the cost of transport due to rising petrol prices.

But tobacco excise does not explain why the cost of living for employees is now rising faster than inflation – something that for the most part has not occurred since the end of 2011:

The reason goes to the makeup of cost of living compared with inflation. The absence of interest payments in the inflation figures is done because one of the primary reasons for interest rate rises is to slow inflation growth. So if interest payments were included in the CPI figures, you would have the very tool being used to curb inflation actually contributing to its growth.

But in our day-to-day lives, mortgage repayments are very much a factor in our cost of living, which is why they are included and the cost of a new house is not.

Employee households are more affected by interest payment changes because they are much more likely to be paying off a mortgage, compared with other households. Age pensioners have mostly paid off their mortgages, and those on government benefits are much more likely to be renters.

The ABS calculates on average (which includes households both with and without a mortgage) employee households spend 8.2% of their weekly income on mortgage interest charges compared with, for example, just 1.1% by pensioner households:

This is of course the tyranny of the average. If you do have a mortgage it is likely you are spending much more than 8.2% (let alone the 1.1% of aged pensioners) of your income to pay it off. But until the ABS starts doing cost of living indices for those with a mortgage and those without, this is the best we can do.

And we can see that the period of falling interest rate payments has ended.

There have now been six straight quarters where the cost of servicing a mortgage has risen on average for employee households:

And if we compare the annual rise in mortgage repayments with the CPI’s housing price measure of “new dwelling purchases by owner occupiers” we can see why, unlike for the past five years, the cost of living for employee households is now rising faster than inflation:

The inflation figures are always a bit of an exercise in trying to provide an average that in the end reflects no one. The cost of living indices try to better portray the reality for different households across Australia. But even here we can see that the average hides the true impact. Households with a mortgage are certainly seeing their cost of living rise faster than their income.

But even so, the cost of living figures are just more evidence to go with the Hilda survey released earlier this week, the latest GDP figures and most people’s lived experience, that households are continuing to see their standard of living go backwards, and until wages start rising faster, that is likely to continue.

Greg Jericho is a Guardian Australia columnist

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