The costs that cut deepest

Senior economist with The Australia Institute Matt Grudnoff looks at the bigger picture in cost-of-living increases for our tribes. Price rises in the things we buy are common to all households but will affect different groups in different ways. Costs may be easily absorbed by some YourLifeChoices tribes, while other tribes may struggle to make ends meet.

The March issue of the Retirement Affordability Index™ applies the Consumer Price Index (CPI) figures from the December quarter to assess the broader impact on the six retirement tribes: Affluent Couples, Constrained Couples, Cash-strapped Couples, Affluent Singles, Constrained Singles and Cash-strapped Singles.

In recent issues, we have focused on the impact of quarterly price rises rather than look at the bigger picture. Because the latest figures complete the 2017 calendar year, it is an ideal time to look at what happened to each tribe across the 12-month period – the prices that went up in 2017 and those that went down. Most importantly, we will assess how these changes in prices affected our different tribes in different ways.

One way to do this is to look at price rises as a percentage of expenditure in key categories.

For example, Constrained Couples experienced an overall 1.6 per cent rise in their cost of living. Health had the biggest impact, accounting for 0.5 per cent of the 1.6 per cent rise.

If we look at the top four contributors for each of the tribes – medical and healthcare, transport, housing, and domestic fuel and power – we discover that the same categories are common to each. But there are big differences in how much each category affected each tribe’s bottom line.

The overall difference varied from 1.3 per cent to 1.8 per cent. The accompanying table shows the impact on each tribe. Also included are significant price decreases when these falls were 0.2 per cent or greater for the year.

Let’s now look at each of the four categories as well as the offsetting categories.

The hot topic, when it came to price rises in 2017, was energy. Almost all of the electricity price increase was in the September quarter (July, August and September). The rises were debated, criticised and defended. The topic was only knocked out of the news by an even bigger discussion – the nationalities of our parliamentary representatives.

The impact of the electricity and gas price rises was different for each tribe. They were most keenly felt by Cash-strapped Singles and Couples, that is, retirees who rent. The energy rises contributed half a per cent to each. These two tribes were more heavily affected because of their lower income compared with other tribes and because electricity is a daily essential.

Another big price increase in 2017, and one which received surprisingly little attention, was the jump in transport costs driven mainly by rising petrol prices. This was most obvious at the start and end of the year. Petrol price increases usually receive plenty of media attention, but for some reason they flew under the radar this year.

Transport price increases had a big impact on all tribes but had the biggest effect on Constrained Couples. If petrol prices stay high – or increase further – then expect them to gain more attention. Another price increase that continued to climb at a steady but relentless pace was housing. Unlike electricity, costs associated with housing were not isolated to one or two quarters. Rather, they rose consistently each and every quarter, and when we look at the increases across the year, we can see they had an impact on all tribes.

However, by far the biggest impact was on Cash-strapped Singles. This tribe felt a massive 0.8 per cent increase for the year – the largest for any tribe. Why? Because of the amount this tribe spends on rent as a proportion of income.

The second biggest impact was on Cash-strapped Couples, who experienced a 0.6 per cent rise, again because of the proportion of income spent on rent.

The fourth key category responsible for cost-of-living increases was health.

The most affected tribe was Constrained Couples, many of whom have private health insurance. Health was also the biggest contributor to the rise in cost of living for the Affluent tribes. Affluent tribes spend a far larger proportion of their income on health than the other tribes, considerably more than the Cash-strapped tribes.

There were price drops in a number of categories over the year. The Affluent tribes spent enough in these categories so that it decreased their cost of living by 0.2 per cent. Household furnishings had a significant impact on both Affluent Couples and Singles. This was mainly driven by falls in the price of computing and technology products.

Communication also had a positive impact on Affluent Singles, decreasing their cost of living by 0.2 per cent. All the other tribes experienced much smaller drops.

As you can see, from the same price rises we get very different cost-of-living increases – all because our tribes have different spending in different areas.

Overall, the Affluent tribes saw increases of 1.3 and 1.4 per cent respectively in their total spending. The Constrained tribes saw increases of 1.6 per cent and the Cash-strapped tribes increases of 1.6 and 1.8 per cent in their total spending.

Electricity price rises were important and petrol price increases were the sleeper issue. But the category that had the biggest effect was the cost of housing.

The other key contributing factor was that the Affluent tribes consumed more of the things that actually went down in price. This limited the impact of the increase in their cost of living.

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All content on YourLifeChoices website 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.

Matt Grudnoff
Matt Grudnoff
Senior economist at the Australia Institute, Matt is a regular contributor to YourLifeChoices and has extensive knowledge on retirement incomes, taxation and tax concessions, the federal Budget, poverty and inequality, free trade agreements, housing affordability, energy economics and climate change. He worked at the Australian Bureau of Statistics and the Department of Climate Change. Matt is the brains behind Australia's most accurate cost-of-retirement table, the YourLifeChoices Retirement Affordability Index™.
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