Key Findings
- Australia’s official inflation measure, the Consumer Price Index, misses the biggest cost most households face or would like to be in a position to face —the cost of homeownership.
- Given decades of often rapid increases in house and apartment prices, the CPI has systematically understated the true rise in the cost of living.
- Since 1998, inflation would have been up to 40 percentage points higher if dwelling prices were included, not the 114 per cent shown in official CPI.
- Real wages haven’t risen as the conventional wisdom suggests: once dwelling prices are included in the CPI, as the US used to do, Australians’ real wages are down between 0.5 per cent and 9 per cent since the late 1990s.
- The cost-of-living debate revolves around a flawed metric, which deviates from households’ experience and risks undermining trust in official statistics.
Introduction
Since the end of the Covid-19 pandemic, Australia’s economic performance has become the subject of significant concern among policymakers and the general public alike.
Increases in the cost of living, including deteriorating housing affordability, have become the main concern for ordinary families.
The cost of living is often used interchangeably with inflation, which in turn has long been measured by the consumer price index (CPI), published more recently on a monthly basis by the Australian Bureau of Statistics (ABS).
As a proxy for the cost of living however the CPI is flawed as it excludes numerous types of expenditures that feature significantly in the lifetime purchases of most households, including the price of buying a home.
In an era of rapidly rising dwelling prices the CPI therefore has understated the increase in the cost of living that households observe, and by extension overstated any growth in real wages, which is calculated by policy makers with reference to the CPI and the wage price index (WPI). This is particularly the case for those households that wish to enter the housing market but have not yet.
This research note estimates an alternative CPI for Australia since 1998 by including a measure of dwelling prices, and then deflates the WPI, to obtain an alternative measure of real wages.
