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?
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