The cost of living is always going up, never down, right?
Not right. And that also means the Age Pension, when it is indexed, doesn’t necessarily always go up.
The Consumer Price Index (CPI) has been published 299 times since 1943. On 11 occasions, the CPI fell – most recently in June 2020 by 1.9 per cent.
The September pension indexation in that year produced an increase of zero per cent. Nada. Zilch.
When the CPI goes down, the pension doesn’t go down. That is good. But neither does it go up. And there’s another nasty hiding in the grass. The pension won’t go up until subsequent inflation catches up with the inflation level just before inflation went down.
The September 2020 pension indexation was followed by the March 2021 indexation. Inflation had more than caught up, so the pension went up again.
Normally, inflation is caused by rising wages. People have more to spend. Demand for goods and services increases and so do prices.
But back in 2020 with COVID raging, it wasn’t demand that had gone up and caused inflation. That time it was supply that had been squeezed.
COVID lockdowns in China closed down manufacturing plants and fewer goods were coming through. Since then, the ban on Russian oil has meant less petrol and diesel coming through.
These things caused prices to skyrocket. But now the tide is turning.
Even China got sick of lockdowns. Factories there have reopened, producing goods as usual and bringing down the price of those products. It’s only the supply of petrol and diesel that’s still a problem, but prices at the bowser haven’t gone as crazy as was predicted.
Now that most supply problems have been sorted out, the CPI has dropped from its peak of 7.8 per cent to 5.4 per cent. The monthly CPI indicator for the month of October is even lower: 4.9 per cent.
It all seems to be part of the trend of things going back to normal, with normal rates of inflation.
It means pensioners will need to get used to the March and September pension indexations producing far lower pension increases than we have seen over the past 18 months or so.
High inflation equals high indexation, low inflation equals low indexation. While it may seem that you’re better off with high indexation, you’re not. Indexation maintains the purchasing power of the pension at the same level.
The only way to increase the purchasing power of the pension by indexation is for inflation to go negative and stay negative. You would be receiving the same dollar amount in the pension, but you could buy more with it.
Do you understand how inflation affects the Age Pension? Why not share your thoughts in the comments section below?
Paul Versteege is policy manager at the Combined Pensioners and Superannuants Association.