Cost-of-living statistics are valuable; the ‘noise’ is not

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Statistics can be a powerful tool to give us insights into complicated issues. But, there’s a famous phrase that goes: ‘There are three kinds of lies: lies, damned lies and statistics.’ So, how do you avoid being fooled? This edition of the Retirement Affordability Index provides a great example.

The change in the timing of when the Retirement Affordability Index is published has meant that there have been two quarters of Consumer Price Index (CPI) data since we last talked about retirees’ cost of living. While it wasn’t planned this way, it was probably the best two quarters to combine in this analysis. Why? Because the June and September quarters saw massive quarterly movements – June 2020 saw the biggest fall ever and September had one of the biggest increases in the past 20 years.

Sounds exciting right? Well, movements in quarterly data are beloved by commentators who are always keen to weave a story out of those changes. But these two quarters have moved in roughly opposite directions. This means they have largely offset each other. The June quarter CPI went down a massive 1.9 per cent, while the September quarter jumped back 1.6 per cent.

Both movements were entirely predictable. Indeed, I did just that in my last Retirement Affordability Index article, Is deflation good news for your living costs?

I wrote: “The Retirement Affordability Index – and its six tribes with six different spending patterns – allows retired households to find a spending pattern that more closely matches their own and thus gives them the most accurate inflation rate.

“But there is a problem at the heart of all attempts to measure inflation and cost of living. The measurements become less accurate if there is a sudden change in households’ spending patterns and the changes in spending are on items that have seen big changes in price.”

The recession, the shutdown and the government’s response to it were the drivers for these big changes. The two biggest were:

  • the government making childcare free in the June quarter (and then making it expensive in the September quarter)
  • fewer people travelling in lockdown causing the fall in petrol prices in the June quarter, followed by the increase in petrol prices as states opened up again in the September quarter.

Movements in our six RAI cohorts are a good example. The figure below shows the movement in June 2020 when prices fell. It also shows the movement in September 2020 when they all rose again.

The big decreases and increases are not as important as the net change over the two quarters. The real question is, was the fall in June bigger or smaller than the increase in September? The next figure shows just that.

We see that the falls were bigger than the increases. This is the real story that could get lost in the quarter-by-quarter movements.

The Australian Bureau of Statistics (ABS) always says to look at the trend data. This is the data that has been smoothed by a rolling average. The ABS says the trend data gives the best understanding of what is happening, by eliminating the volatile ‘noise’ in the data.

Despite this, you will always see the media and commentators use the seasonally adjusted data, which is much more volatile than the trend data. Movement in data means a story can be created. And the media love a story – even if that story ends up being just volatility in the data.

Looking at both quarters together, we can see that the cost of living for retirees has fallen, not risen as the September data would have us believe. But it has not fallen nearly as much as the June data would have us believe.

What does the longer-term story tell us? The figure below shows us the difference in the increase in the cost of living for each of our six cohorts since June 2017. We see that until the last two quarters, they increased steadily except for a small blip in March 2019, when petrol prices fell back from previously high levels. But even that blip didn’t change things very much.

As a general rule, affluent retirees (homeowners with private income) experienced a slightly lower increase in their cost of living and cash-strapped retirees (renters who receive an Age Pension) a slightly higher increase in their cost of living. Constrained retirees (homeowners who receive a part or full Age Pension) are in the middle.

The most recent changes are big compared to previous times, with the recession and pandemic likely to have a big ongoing impact on living costs. Inflation will remain low with decreased demand in the economy. Businesses struggling to maintain sales won’t put up their prices. But the changes are not nearly as big as the quarterly figures would have us believe.

The lesson here is that it is better to take a longer view if you want to really know what is going on. Short-term volatility might be the perfect material to build an exciting story, but noise in the data ultimately tells you nothing. Remember: in eight out of five people, three don’t exist.

Did you notice any significant change in costs in the June and September quarters?

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Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

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