CPI informs many government decisions, but is it still accurate?

Is the Consumer Price Index (CPI) still fit for purpose?

In simple terms, the CPI tracks the changes in the price of a fixed ‘basket’ of goods and services every quarter. That sounds simple, right? But what if we aren’t putting the right things in that basket?

The CPI is tracked by the Australian Bureau of Statistics and once upon a time it covered mortgage interest payments. Now it just covers the price paid for housing.

It also covers the following:

  • food and non-alcoholic beverages
  • alcohol and tobacco
  • clothing and footwear
  • housing
  • furnishings, household equipment and services
  • health
  • transport
  • communication
  • recreation and culture
  • education
  • insurance and financial services.

Now, even the most economically challenged can see mortgage interest rate payments are often the most expensive costs any household can bear.

When mortgage interest rates were excluded from the CPI in the 1990s, mortgage rates were relatively steady and there wasn’t much pushback from the public, but should that change?

Even the government is ambivalent about the CPI’s accuracy for measuring household costs, saying: “The CPI is often used to measure changes in the cost of living, but it is not an ideal indicator of this.”

When mortgage interest payments are steady, it’s not much of a problem, but when they begin to increase and put cost pressure on households – and the CPI disregards that cost – then the flow-through can be damaging.

There is also a lag between real-time price increases and when the data is used and published to set the CPI. That can be particularly damaging in times of price volatility such as during COVID and ever-increasing energy costs. The lag can be up to six months.

Why is the CPI so important?

The CPI is the basis for a lot of government and government department decisions, from the Reserve Bank of Australia setting the official interest rate to Age Pension payments.

The Age Pension is indexed twice a year in March and September. That indexation is calculated using the CPI or the Pensioner and Beneficiary Living Cost Index (PBLCI), a separate index for households receiving pensions. Basically, pension increases are based on whichever index is higher and then that is benchmarked to the male total average weekly earnings (MTAWE).

Sounds complicated? It is.

Let’s break it down. You want the CPI and the PBLCI to accurately reflect the cost of living so the pension will increase to match that cost of living. If it doesn’t, pensioners’ spending power will diminish.

The CPI increased 4.1 per cent for the year to December 2023. While the PBLCI increased 5.7 per cent for the year ending in the September quarter.

True cost of living

However, investment site Firstlinks estimates the true cost of living at about 9 per cent.

And it’s not just a problem for people on the Age Pension.

The number of older Australians still paying off a house is steadily increasing. According to the Sydney Morning Herald, in the 2019-20 financial year, the portion of homeowners aged 55 to 64 with mortgage debt reached 54 per cent – a significant jump from 23 per cent in 2002-03.

No doubt they, too, want the CPI to accurately reflect their cost of living including interest payments.

What can you do? Apart from lobbying the government to reintroduce mortgage interest payments, not much. But there is some good news on the horizon as interest rates are tipped to remain steady for the near term, thus easing household costs.

History of the CPI

The CPI was first officially compiled in 1960, although similar data was collected as far back as 1901.

The CPI was designed to measure quarterly changes in the retail prices of goods and services purchased by metropolitan wage-earning households.

In the 1990s, as well as removing mortgage interest charges, the coverage was expanded to all private households in the eight capital cities. Previously it surveyed only metropolitan wage-earning households. This saw the population coverage increase from 29 per cent of private households, to 64 per cent.

 It is the longest continuous time series published by the Australian Bureau of Statistics.

Do you think the CPI is accurate? Do you think it should be changed? Why not share your opinion in the comments section below?

Also read: Super funds ‘unprepared’ to meet obligations, says ex-regulator

Written by Jan Fisher

Accomplished journalist, feature writer and sub-editor with impressive knowledge of the retirement landscape, including retirement income, issues that affect Australians planning and living in retirement, and answering YLC members' Age Pension and Centrelink questions. She has also developed a passion for travel and lifestyle writing and is fast becoming a supermarket savings 'guru'.

5 Comments

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  1. While I’m not an economist or statistician, I would suggest the ABS Living Cost indices are a better measure of rising costs of living than the CPI achieves. While it might not be relevant to your readers, the ‘Employee’ Living Cost Index rose by 9% over the year to December 2023 – mainly due to the inclusion of mortgage payments (principal and interest) in the Index. Apparently, this used to be the case for the CPI, but a couple of decades ago, this cost component was removed from the CPI because it was held that those in receipt of government benefits probably couldn’t afford to own or repay a house – how short-sighted! Maybe a part 2 to this article should focus on that Index as reported in the linked SMH article, and how the CPI is being wrongly used by many sectors of our society to try and measure something it was not designed to measure.

  2. One of the problems using the CPI as the reference for setting various payments etc. is that the content of the “Basket” can and has changed at the whim of the Incumbent Government, as noted in the article, Mortgage Interest Rates were removed in the 90’s. The mix and weighting of the rest has also changed, with the associated CPI figure being reduced to more like what the Incumbent Government was looking for.
    I agree with Andrew Davies that the ABS Living Cost indices are closer to the mark, and also we should migrate towards a Tax Free Universal Living Pension for everyone of Pension Age, with any additional income taxed at the appropriate rate.

  3. In the case of the CPI being used to set pension increases it needs to be better weighted towards goods and services that most pensioners actually need and purchase.
    Many common groceries which most pensioners purchase have risen by over 20% during the past year while some home and contents insurance, which many pensioners like to hold, annual premiums have increased by 40%.
    Many of us are in that boat and the CPI producing a pension increase of 4% is a sick joke.

  4. The CPI is not a fair reflection on Cost of Living. Age Pension should ne adjust quarterly i.e. January, April, July, October. For instance. Electricity up 58% 1st February, Private health increases 1st April each year. Fuel up now. Insurances up which pushes GST too. Age pension does NOT cover these periods when adjusted March. September. CPI. and other formula indicates much more than we received

  5. The problem with using the CPI to determine pension or wage increases is that it includes many things lower-income earners do not buy, which brings the CPI well below the actual cost of living increase that those income earners suffer. As David Ryder points out, insurance rose by 40%. Many essential food items rose by 20% or more. Electricity rose by about 30%. Household appliances, furniture and clothing costs might fall in a quarter, but lower income earners spend very little on such things. So the CPI does not accurately reflect the increase in living costs for lower-income earners, while it might actually be less than the increase for higher-income earners.

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