New data from the Australian Bureau of Statistics has revealed that while the inflation rate has slowed over the past decade, the reason many people haven’t felt an improvement in their cost of living is that prices of non-discretionary, or necessary, items have on average risen nearly 4% more since 2012 than those of discretionary items.
Whenever the latest inflation figures come out there is always a fair amount of complaint among people (including in the comments on my articles) that the figures don’t represent reality.
And of course that is true. No figure that provides an average for every Australian household is ever going to reflect anyone’s particular life perfectly.
For example, the ABS calculates that every household spends on average 7.84% of their weekly expenditure on buying a new house. Now, clearly we are not all buying houses, but when you average all of the spending on new houses across all households, that is the average you end up with.
Even more weird is that while we are (on average) spending that much on buying a new house, we are also at the same time spending 6.8% of our weekly expenditure on rent.
This doesn’t mean the inflation figures are wrong, just that they can paint a distorted picture due to the averaging.
To overcome some of these issues, the ABS also produces household cost-of-living indices, which break down spending by household type:
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But even these are not perfect. Yes, certain households may spend more or less than others on luxuries and discretionary items such as overseas holidays, but clearly not all of us are heading overseas (even before the pandemic).
Similarly, while the ABS suggests that, on average, employee households spend 3.2% of their weekly budget on tobacco, that includes all people who don’t smoke. Clearly, if you do smoke, cigarettes are taking up a heck of a lot more than 3.2% of your weekly budget.
This is why the ABS has issued a new set of figures that break down inflation not by household type but by whether the items are non-discretionary (ie necessary) or discretionary.
The ABS estimates that, on average, 58% of our weekly spending is on necessary items:
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There are still issues of averaging but these new categories give a clearer picture of the rise of prices we can’t avoid and those we can.
The big thing the data reveals is that you really need to give up smoking if you want your cost of living to fall.
From 2012 to March this year (ie excluding the madness of the pandemic), the prices of discretionary items have risen 14.7%, but when we exclude tobacco, discretionary items have risen only 7%:
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They also show that since 2012 the cost of essential items has risen by 1.7% more than the overall CPI and by 3.8% more than discretionary items.
Since 2012 there have been lengthy periods when the price of essential items has risen much faster than that of non-discretionary ones, but no period where the opposite has been true:
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That certainly is something that would ring true to many people because the issue with non-discretionary items is you have to keep paying for them – regardless of how flush you are feeling. And while the price of discretionary items may fall or rise by less than other things, you can only take advantage of it if you have the money to afford it.
And where this difference really hits home is when you compare the growth of wages with non-discretionary items:
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In 2013 and 2017 the rise in the cost of essential items easily outpaced that of wages, and in 2012 and 2016 the rise was essentially the same.
It means that real wages have grown since 2012 by 4.5% when you use CPI as the measure of prices, but just 3.4% when you use the rise of non-discretionary prices:
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These new figures provide an excellent addition to our knowledge of the economy.
They support the view that while we may be experiencing low inflation, the cost of living in many households has remained a struggle as weekly bills continue to rise even while the cost of luxuries becomes relatively cheaper.
