CPI is a lie. Or at the very least, a half truth.


Purchasing Power more relevant than CPI

Eggs in China

For many years, Australians have measured their household wealth by observing the CPI (Consumer Price Index) as reported by countless news organisations.

But what if CPI was as relative to your wealth potential as the price of eggs in China? Well, it’s more important than that but it isn’t as pure a measure as you would think, because while it measures our increasing costs of living, it doesn’t count the effect of increasing income.

And there has been plenty of discussion about the cost of living in recent times to justify subdued levels of consumer confidence and general mood of conservatism. Much of the focus has been on the rising cost of utilities – electricity, gas and water rates. But council rates, health costs, education, petrol prices and housing rents are also frequently cited when discussing the rising cost of living.

When mums and dads talk about the cost of living, they point to the increasing size of the bills they receive or the prices they pay at retail outlets.

But these concepts really explain nothing in isolation. A far better concept is purchasing power, where living costs are compared with wages. And it may surprise you that life just keeps getting better for most Australians. Purchasing Power will help you understand why politicians keep telling us how lucky we are.

For instance, home affordability is now at the best levels in almost a decade (since June quarter 2003). And mortgage affordability is the best in nine years – for someone on the average wage it now takes 1.49 weeks to pay the monthly mortgage – the best since December 2003.

Petrol is 12 per cent more affordable than five years ago and little changed over the past decade. But in Sydney this week petrol was at $1.20 a litre with discount vouchers – the most affordable in 25 years of records. Car affordability is also the best since 1976. As the old adage goes: don’t worry, be happy.

If purchasing power is a better measure of our financial position, you might be asking why you keep hearing so much about CPI and the answer lies in the question itself. Not only is it easier to find CPI statistics  but our trusted news organisations still prefer to sell us their tales of woe rather than show us how well we’re growing as a nation.

*Source: CommSec Research

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