Australia’s cost of living over the last decade

Alicia Hall, Statistics and Mapping

Key issue
Recent increases in the cost of domestic electricity and gas have reignited concerns around the increasing cost of living in Australia. The ‘cost of living’ in Australia can be analysed using several indicators from the Australian Bureau of Statistics (ABS), namely the Consumer Price Index and Living Cost Indexes for selected households. Analysis of these measures over the past ten years indicates there has been significant variation in the relative prices of goods and services. The overall level of prices has increased 23.4 per cent. This is slightly lower than wage growth, which increased 30.5 per cent over the same period.

Price rises in the cost of essential goods such as electricity, gas, housing and petrol often give rise to concerns around the 'cost of living' in Australia. However, in order to assess whether living costs have increased over a period, a broad range of non-discretionary costs (such as medical expenses, food and utilities) and discretionary costs (such as entertainment and clothing) need to be considered, as well as the proportion of a household's expenditure allocated to different expenditure items. Although not explicitly part of this analysis, it is also important to look at changes in income levels over time in assessing the impact of price increases.

The ABS publishes several measures that can assist in understanding changes in the cost of living:

  • The Consumer Price Index (CPI)—this measures changes in the price of a basket of goods and services over time, designed to be representative of average household expenditure. Notably, it is calculated using price changes within capital cities. As such, it does not measure price changes in regional, rural or remote areas, and cannot be used to compare differences between capital cities and regions. The CPI does not include the cost of purchasing established dwellings, although it does include rents and new dwelling purchases excluding the value of the land.
  • Selected Living Cost Indexes—these measure the impact changes in prices have on expenditure on goods and services for a range of different household types (employees, age pensioners, other government transfer recipients and self-funded retiree households), determined with reference to their actual spending patterns. These are only available at an Australia-wide level. The Selected Living Cost Indexes attempt to capture the changes in housing costs through changes in rents and mortgage interest charges. Mortgage interest charges are impacted by the level of housing debt and mortgage interest rates. 

Consumer Price Index

Over the last ten years (March 2009 to March 2019) the overall inflation rate, measured by the CPI, has increased 23.4 per cent. However, looking at specific expenditure classes within this rate, certain items have increased more rapidly. Table 1 ranks the ten highest percentage increases in prices by expenditure class over the last ten years. However, as outlined in Table 2, many of these items do not represent a significant proportion of expenditure in the basket of goods and services measured by the CPI.

Table 1: highest percentage increases in prices over ten years, 2009 to 2019

Expenditure class Ten year
increase (%)
Tobacco 218.1
Electricity 100.9
Medical and hospital services 78.8
Gas and other household fuels 75.6
Child care 75.1
Secondary education 66.8
Water and sewerage 66.8
Property rates and charges 63.6
Preschool and primary education 55.8
Other services in respect of motor vehicles 55.8

Source: ABS, Consumer Price Index, cat. no. 6401.0, ABS, Canberra, 2019, Table 7; Parliamentary Library estimates.

The reasons for these cost increases are diverse. Increases in the price of tobacco for example are linked to Government increases in excise, including a new indexation regime introduced in December 2013 which was extended to 2020. Increases in the costs of private health insurance premiums have contributed to changes in ‘medical and hospital services’ in the CPI. Changes in the cost of child care are linked to increased demand, as well as changes in industry standards. The Reserve Bank of Australia (RBA) has reported that the pace of child care inflation has declined in recent years.

The causes of the significant rises in utility prices are complex. Reasons for electricity price increases include increases in network costs, increases in wholesale costs and environmental schemes. Some of the key drivers which impact on residential gas markets include distribution charges, declining household consumption, wholesale gas prices, retailer costs, pricing and tariff structures, and carbon pricing.

Notably, some of the items which have seen large price increases are inelastic in demand, that is, in the short-term, people’s use or expenditure on them is not particularly responsive to price increases.

Many of these items do not represent a large proportion of expenditure in the average household budget. This is illustrated in Table 2, showing the items’ (from Table 1) contribution to total CPI in the March 2019 publication:

Table 2: contribution to CPI by expenditure class, March 2019

Expenditure class Contribution to
March CPI (%)
Tobacco 3.0
Electricity 2.5
Medical and hospital services 4.0
Gas and other household fuels 0.9
Child care 1.3
Secondary education 1.8
Water and sewerage 1.0
Property rates and charges 1.5
Preschool and primary education 0.9
Other services in respect of motor vehicles 1.4

Source: ABS, Consumer Price Index, cat. no. 6401.0, ABS, Canberra, 2019, Table 12; Parliamentary Library estimates.

Not all goods and services have increased in price over the last ten years. Table 3 shows the ten largest percentage declines by expenditure class as at March 2019 compared to March 2009.

Table 3: lowest percentage increases in prices, 2009 to 2019

Expenditure class Ten year
decline (%)
Audio, visual and computing equipment -70.1
Garments for women -20.4
Telecommunication equipment and services -19.6
Household textiles -18.9
Games, toys and hobbies -18.4
Footwear for women -15.6
Personal care products -15.1
Footwear for men -14.6
Milk -14.4
Major household appliances -14.3

Source: ABS, Consumer Price Index, cat. no. 6401.0, ABS, Canberra, April 2019, Table 7; Parliamentary Library estimates.

The expenditure class with the biggest ten year decline in price—audio, visual and computing equipment—includes items such as televisions, DVD players, cameras, computers, printers and radios. In looking at low levels of inflation over the last 25 years, the RBAstates:

… in the case of consumer durables and audio-visual equipment, technological improvement has clearly been an important factor, but competition in the retail sector has also played a significant role.

One aspect of this is that advances in technology often improve the quality of products without increasing the prices, which shows up as a decline in the price in the CPI.

Given that household spending patterns change over time, the proportion, or weighting of different goods and services in the CPI also needs to change. Previously updated every six years using the Household Expenditure Survey, weights are now also adjusted on an annual basis using the ABS' Australian National Accounts data (Household Final Consumption Expenditure). 

The expenditure class items currently making the biggest contribution to CPI are as follows:

  • new dwelling purchase by owner-occupiers (8.0 per cent)
  • rents (7.1 per cent)
  • medical and hospital services (4.0 per cent)
  • other financial services (4.0 per cent)
  • restaurant meals (3.3 per cent)

Living cost indexes

The ABS’s Living Costs Indexes are useful in understanding levels of inflation within particular household types. Table 4 shows that ‘other government transfer recipient households’ (that is, those on a government pension other than the age pension or veterans affairs pension) have experienced the greatest increases in costs over the past decade, and employee households the lowest, although the differences between household types are not huge.

Table 4: increases in CPI by household type, 2009 to 2019

Household type Ten year
increase in costs
(%)
Pensioner and beneficiary households 25.1
Employee households 19.3
Age pensioner households 23.8
Other government transfer recipient households 26.1
Self-funded retiree households 22.8
All households (CPI) 23.4

Source: ABS, Selected Living Cost Indexes, Australia,cat. no. 6467.0, ABS, Canberra, May 2019, Table 1; Parliamentary Library estimates.

The reason why different households have different levels of cost increases is associated with their consumption patterns, and because not all prices increase at the same rate. Under the current weighting:

  • the proportion of expenditure allocated to food and non-alcoholic beverages is highest for age pensioner households, and lowest for self-funded retirees
  • the proportion of expenditure allocated to alcohol and tobacco is highest for ‘other government transfer recipient households’ and lowest for ‘age pensioner households’
  • housing costs (which do not include house purchases) represent a significantly higher proportion of expenditure for ‘other government transfer recipient households’, closely followed by pensioner and beneficiary households. Self-funded retirees have the lowest proportion of expenditure on housing
  • in terms of health expenditure, ‘other government transfer recipient households’ have the lowest proportion of expenditure of all household types, and self-funded retirees the highest and
  • employee households are characterised by relatively higher expenditure on insurance and financial services and education.

The rate of growth in nominal wage rates has been weak in recent years. However, given that increases in inflation have also been quite low, slower real wage growth has not been as pronounced. Over a ten-year period, the wage price index has increased 30.5 per cent, slightly more than inflation at 23.4 per cent.

Conclusion

While some prices have experienced high growth over the last ten years, including utilities, these do not represent a large proportion of average household expenditure. However, certain households will feel the impact more strongly than others, particularly in the context of low wage growth.

Further reading

G Debelle (Deputy Governor, Reserve Bank of Australia), Low inflation, speech, 22 August 2018.

Australian Competition and Consumer Commission (ACCC), Restoring electricity affordability and Australia’s competitive advantage, ACCC, Canberra, 11 July 2018.

T Wood and D Blowers, Price shock: is the retail electricity market failing consumers, Grattan Institute, Melbourne, March 2017.

 

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