Is the Cost of Living Really Increasing?

Listen to the media and our politicians and you’ll hear all kinds of talk about increases in the cost of living and the pressure it is putting on families. Problem is, it’s just not true.

The chart below shows changes in the Consumer Price Index, which is the standard measure for inflation. As you can see, there were steep increases in the cost of living around 1950, through the 1970s and in 2000. But the increases over the last decade have been quite modest, and well below income growth.


household income2
But the CPI can be a crude measure. Consider then disposable income. Using data from the 2009-10 ABS Household Expenditure Survey the AMP.NATSEM Wealth and Income Report (May 2012) shows that every income group spends at least one-third of their income on discretionary items, that is things that are not necessary to survival (eg food) or to functioning in modern society (eg TV, computer, childcare). What’s more in every group discretionary spending has increased compared to 2003, with the exception of one where it has remained the same.

The AMP.NATSEM report concludes that Cost of living pressures are perhaps a fact of life for many households but they aren’t primarily sourced from petrol prices or electricity bills or the price of bananas.In fact,they mostly do not relate to prices these days at all.Instead, they relate to households having larger incomes and spending more money on a whole range of new goods and, in particular, services that are either aspirational in nature or necessary in dealing with the demands of a modern society.

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