We learnt last week inflation is officially 6.1% – way above the average in the last 20 years of two.5%. This really is right in the center of the Reserve Bank's 2-3% target band.
But although the rates are now 6.1%, few people faces it. It depends on which you buy.
And there's one big anomaly right now.
The “basket” of products and services whose prices the Bureau of Statistics uses to work out the consumer price index is covered with one item, one most Australians rarely buy.
It is what the bureau calls “new dwelling purchase by owner-occupiers”.
This is mostly the cost of creating a new home (excluding the cost of the land) and also the cost of major renovations, but not repairs.
We rarely develop a house, and barely pay up front
Even though very few Australians pay this cost in almost any given year, and some never pay it, it makes up almost 9% of the total basket, a heavier weight than any other single item in the Consumer Price Index.
By method of comparison, bread – an item most households buy every day – makes up only 0.53% from the index. “New dwelling purchase” comprises 8.67%.
New dwelling purchase gets such a big weight because it is so expensive, sometimes around half a million dollars or more. Like the majority of other items in the consumer price index, bread cost less.
We buy bread more regularly, however it scarcely counts
Normally once the cost of “new dwelling purchase” isn't moving by much (or by a lot more than other prices) it does not much move the index.
But material and labour shortages imply that over the past year alone, the cost of new dwelling purchase has jumped by a lot more than 20%. In the June quarter it was accountable for almost a third – 0.5 points – of the 1.8% rise in the entire consumer price index.
If your interest is the modification in household cost of living, the inclusion from the cost of purchasing a home is a concern as the not many people who pay it mostly do not pay it upfront. They remove a loan which they pay off slowly.
Measured differently, costs didn't rise 6.1%
Before 1998 the bureau used another so-called “outlays” method of measuring inflation that measured payments made to gain access to products or services.
The resulting weight of housing within the index was much lower.
The bureau still uses the outlays approach to calculate separately-published living cost indexes published on Wednesday.
Using these indexes, ANU modelling suggests about 80% of households had a living cost increase underneath the consumer price index of 6.1%.
The median (typical) increase in the last year is 4.7%, meaning 1 / 2 of households had increases in living costs below 4.7%.
Half of us faced less than 4.7%
Among the households whose living costs have climbed by under 6.1% would be the majority of those headed by people on the JobSeeker unemployment benefit.
The living costs for these households climbed by 5%.
Yet in September this season the advantage increases as a whole through the increase in the customer price index, and therefore for once the living standards of households receiving those benefits will proceed.
Wage earner living costs have increased just by 4.6%, suggesting wage increases in line with the consumer price index would also leave them ahead.
Our modelling suggests high income families a break down living costs increase of only 4.5%, when compared with 4.9% for lower income families.
For the moment, the low living cost indexes really are a better guide to changes in living costs compared to consumer price index.
In time, as the increases in the price of new dwellings subside, the difference will end up less stark. Indeed, as home loan rates increase within the year development in the living cost indexes might exceed the consumer price index.
This article is republished in the Conversation. Read the original article.
