Wednesday, February 16, 2011

Inflation whingers bite the very hand that feeds them

Have you been struggling to cope with the rapidly rising cost of living? Well, tell it to the pollies because I don't believe it. Actually, the pollies probably don't believe it either but they'll pretend to rather than risk offending you by telling you to stop feeling sorry for yourself. They care about your approval, not your edification.

Ever since 1957, when the British prime minister Harold Macmillan caused uproar by telling the Poms they'd "never had it so good", politicians have been wary of incurring the voters' ire by reminding them of their growing prosperity.

Many people prefer to see themselves as put-upon and pollies are happy to go along with the self-deception as long as it keeps them out of trouble. The really weak ones would agree with a proposition that you'd never had it so bad if they thought it would humour you. (And the shock jocks are no better.)

My theory is that if people are reduced to whingeing about the cost of living, it's a sign they don't have any more pressing problems to complain about. The cost of living is always rising, so there's always something to complain about if you're that way inclined.

Many people have long believed living costs are rising considerably faster than the official measure of inflation, the consumer price index, and now the Bureau of Statistics has appeared to confirm their suspicions by publishing special cost-of-living indices for particular types of households.

The CPI is an imperfect guide to living costs, partly because it's an average for all capital-city households, whereas different types of households have differing spending patterns. Mainly it's because, for "conceptual reasons", the CPI takes no account of the ups - and downs - of mortgage interest payments.

This week the bureau issued figures showing that, whereas the CPI said prices rose by 2.7 per cent over the year to December, the cost of living for employee households rose by 4.5 per cent, as it did for non-aged welfare recipients.

For age pensioners costs rose by 3.1 per cent, whereas for the self-proclaimed self-funded retirees they rose by about the same as the CPI: 2.6 per cent.

So, does this prove life is as expensive as you think, as one headline had it? No, it doesn't. Why not? Because you think your cost of living rose by a mighty lot more than 4.5 per cent last year.

What it proves is that, while the CPI may at times understate the rise in your cost of living, it doesn't understate it by nearly as much as you'd like to believe. And remember this: at times when mortgage interest rates (and fruit and vegetable prices) are falling rather than rising, the CPI is likely to overstate the rise in your living costs.

This means that, since interest rates and fruit and vegie prices regularly go up and down, over time much of the difference between CPI inflation and the cost of living comes out in the wash.

Consider this: over 11 years to December, the CPI rose by 43.8 per cent, whereas the living-cost indices rose by 43.6 per cent for self-funded retirees, 48 per cent for employees, 48.4 per cent for age pensioners and 50.3 per cent for non-aged welfare recipients.

A difference of 4 percentage points or so over a period as long as 11 years isn't a lot to write home about. The perpetually self-pitying self-funded retirees have nothing to complain about but the people with most to complain about, those on sole-parent pensions or the dole, are the people we feel least sympathy for (which is precisely why successive governments have screwed them).

Why is it so many of us imagine our living costs to have risen by far more than any official measure of price increases records? Because of the frailties of human nature. We make casual observations of changes in the prices we pay, whereas the Bureau of Statistics - which sends people out to check prices in supermarkets and many other retail outlets around the nation - calculates it all very thoroughly.

You and I take no account that the car or computer we buy today does more tricks than the last one we bought but the bureau makes allowance for this "quality improvement" so as to distinguish between rises in the cost of living and rises in our standard of living.

More pertinently, you and I vividly remember the big prices rises we've suffered - electricity and water rates in recent times, petrol prices at other times - while being vaguer about the small price falls we've enjoyed and taking no notice of the many prices that don't change (but which, of course, are working to hold down the rise in our cost of living).

The high dollar and weak retail sales have brought more falls in prices than most of us realise.

The bureau's records show the prices of clothing and footwear fell by 4.8 per cent last year. The combined prices of household contents and services fell a fraction, while the prices of new cars fell by 1.5 per cent, the prices of phone calls and internet service providers fell by 0.6 per cent, the prices of electronic entertainment devices and computers fell by 7.8 per cent.

The prices of overseas holidays fell by 1.2 per cent, and those for domestic holidays fell by 3 per cent.

And while the overall cost of living was rising, so were our incomes. To quote Macmillan in full: "Let us be frank about it. Most of our people have never had it so good."