After a huge fracas that saw a new prime minister emerge, politicians are trying to convince us that it is really you and I they want to focus on. While it is unlikely that there was a single cause for the bloodletting that saw Malcolm Turnbull toppled and former Treasurer Scott Morrison installed as leader, cost-of-living pressures around electricity prices have been trotted out as one reason.
New Prime Minister Mr Morrison has charged new Energy Minister Angus Taylor with the task of reducing electricity prices. The Government now seems convinced that rising electricity prices is the issue voters are most concerned about. But is that really the case?
Politicians love to talk about cost-of-living pressures and how they’re taking action to reduce them, or in the case of the Opposition, how the Government is out of touch and not suitably concerned about them.
The Consumer Price Index (CPI) measures how prices are rising for the average household and YourLifeChoices takes a closer look at cost-of-living pressures for our retirement tribes in its quarterly Retirement Affordability Index™. Given all the sound and fury from Canberra, you might think that both the CPI and retirement affordability are running at record rates reflecting the big increases in prices.
Now I’m going to tell you something that no politician will ever tell you. They will never tell you this because they fear being labelled as ‘out of touch’ and ‘elitist’. But the fact is that cost-of-living pressures are fairly modest by historical standards. The CPI has been running at or just below two per cent per year for almost four years, which is well below the long-term average.
For our retirement tribes, it is not very different. Just like the CPI, all our tribes’ expenses have been at or below two per cent per year over the past four years.
Does this mean that concern over cost-of-living increases is manufactured?
There does seem to be genuine concern in the community, but I think this has more to do with the level of income growth and the goods and services that are rising rapidly in price.
While average prices are not rising rapidly, neither are incomes. Incomes have been rising at a similar rate to inflation. According to Household, Income and Labour Dynamics in Australia (HILDA) data, the median income, after tax, per household peaked in 2009, then recovered slightly, but has not risen since 2014.
This means that the median household can buy fewer goods and services with its current income than it could with its income nine years ago. Their purchasing power has not improved.
How well you feel financially has more to do with the difference between how quickly prices are going up compared with how quickly your income is rising. You’re going to be better off if inflation is three per cent and your income is rising at four per cent than if inflation is two per cent and your income is rising at two per cent. This is true whether your income is from wages, an Age Pension or an account-based pension.
The stagnation in incomes is not evenly spread. Our quarterly retirement affordability table (LINK) shows that retirement tribes with the lowest incomes have faced the biggest increase in their cost of living, while tribes with the highest incomes have faced the lowest increase in their cost of living. This is important because it might explain why our politicians think electricity prices are our biggest concern.
Electricity is a necessity in a modern society. It is also something that is difficult to reduce when the price goes up. This means that low-income households face hard decisions such as ‘eat or heat’.
When income growth is slow, a rise in the price of electricity means less spending in other areas. As with other essentials, low-income households spend a larger proportion of their income on electricity. Cash-Strapped Couples spend 4.7 per cent of their income on electricity, while Constrained Couples spend 3.8 per cent and Affluent Couples 2.9 per cent. So it follows that an increase in electricity prices has a greater effect on the budgets of Cash-Strapped Couples than on Affluent Couples.
This is equally the case for other essentials such as housing. Cash-Strapped Couples spend 29 per cent on housing while Affluent Couples spend 13 per cent.
But the other really important part of this story relates to incomes. The Age Pension is linked to increases in inflation. With inflation running at low levels, the Age Pension is also increasing slowly. Increases in income from superannuation and other investments are linked to how well business is doing. Business profits are up 10 per cent over the past year which translates into better superannuation and investment returns. This would suggest that retirees who are reliant on the Age Pension are not seeing their incomes rise nearly as fast as those who rely on super and other investments.
Combining all of this, we can see why increases in electricity prices have become such an important political issue. Those on lower incomes are seeing their real incomes fall, while essentials such as electricity rise quickly in price. With the focus almost entirely on rising prices, the slow increase in income growth is barely attracting attention.
Of course, increasing income growth is a harder task for a government to achieve. It is far easier to blame renewable energy and to talk as much as possible about reducing electricity prices.
Have you found your money doesn’t stretch as far as it used to a few years ago?