Put the lid on your inflation
AUSTRALIA’S consumer price index may have officially risen 6.1 per cent in the year to June – the fastest increase in more than two decades – but cost-of-living pressures are not one-size-fits-all.
New homebuyers could be facing a personal inflation rate about 11 per cent, while car-free renters are closer to 3 per cent.
To help people identify where they stand, News Corp has developed a personal inflation calculator that also shows the levers they can pull to reduce their individual rate.
“Inflation might be higher for some people but lower for others, and that’s the whole benefit of this tool,” said independent economist and computational finance expert Dr Marcus Smith, who consulted on the calculator.
“You can tailor it to your own circumstances and consumption patterns.”
The personal inflation calculator is based on household expenditure data provided by the Australian Bureau of Statistics. It works by weighting the value of a typical basket of goods so that specific items make up different portions of the basket for different people.
The calculator is heavily influenced by two of the biggest expenses currently affecting Australia’s cost of living: fuel and housing.
A person who has bought a new property in the past 12 months and drives is going to have a much higher inflation rate than someone who has not.
One interesting aspect of the calculator is the impact of being a smoker versus a non-smoker. Cigarette and tobacco prices only increased 1.5 per cent over the past 12 months, meaning that as a category it lowers the overall personal inflation rate.
The tool is an indicator only and does not take into account all individual circumstances.
Dr Smith said the CPI was used by policy makers to measure the cost of living and by individuals to compare cost of living with changes in their wages. However, the CPI did not tell the whole story about inflation.
One disadvantage of relying on the headline CPI figure is that it does not include data from regional areas, where the cost of living is typically higher.
“The lower the number of businesses, the lower the competition, which will ultimately lead to relatively higher prices,” Dr Smith said. The CPI also does not take into account people’s ability to substitute goods and services for less expensive options.
“For example, bananas went up in price when we had cyclones, so people just stopped buying them and substituted for another fruit,” Dr Smith said. “Also, people might take public transport instead of using fuel.”
Another major disadvantage of the CPI measure is that it excludes costs relating to the purchase of established dwellings and investments such as shares.