Key issue

In the 12 months to March 2022, the Consumer Price Index (CPI) increased by 5.1%, the highest annual rise reported since the introduction of the GST in 2000.

The cost of living can be analysed through various indexes produced by the Australian Bureau of Statistics (ABS).

Recent increases in the cost of living indexes were primarily driven by price increases in transport and housing.

Cost of living measures

Price rises in the cost of essential goods such as housing, utilities, petrol, and groceries often raise concerns around the cost of living in Australia. To assess whether living costs have increased over a period, a broad range of household costs need to be considered, as well as the proportion of household expenditure allocated to different expenditure items. The ABS publishes several measures that can assist in understanding changes in the cost of living.

The Consumer Price Index (CPI)

The CPI measures changes in the price of a basket of goods and services over time, designed to be representative of average household expenditure. It is calculated using price changes within each capital city only and cannot be used to compare differences between regions. The CPI does not include the cost of buying established dwellings but includes rents, the cost of new dwellings (excluding value of land) and major alterations and additions to dwellings. Mortgage repayments are not included in the CPI. The CPI is often referred to as the measure of inflation, or headline inflation.

• During the most recent 2-year period (March 2020 to March 2022) the CPI rose 1.1% in the first 12 months, but 5.1% in the second. This rise of 5.1% was the highest annual rise reported since the introduction of the GST in 2000.

Underlying inflation

The ABS produces 2 key measures of underlying inflation – the ‘trimmed mean’ and the ‘weighted median’. These measures are designed to reduce the impact of irregular price changes by removing changes in the most volatile categories such as fuel. Over the long-term, the ‘all groups CPI’ trend will be similar to both the ‘trimmed mean’ and ‘weighted median’.

• In the most recent year (March 2021 to March 2022) the ‘trimmed mean’ rose by 3.7% and the ‘weighted median’ 3.2%, as opposed to the ‘all groups CPI’ of 5.1%.

Table 1            Long-term and short-term changes in measures of inflation, June 2002 to March 2022

Index	Annual change in index (%)
	Long term	Pandemic year 1	Pandemic year 2	Total: 2 years of pandemic
	June 2002 to March 2020 (a)	March 2020 to March 2021	March 2021 to March 2022	March 2020 to March 2022
All groups CPI	2.4	1.1	5.1	8.3
Trimmed mean	2.5	1.1	3.7	4.9
Weighted median	2.6	1.2	3.2	4.4

(a) Trimmed mean and weighted median have only been reported since June 2002

Source: Australian Bureau of Statistics (ABS), Consumer Price Index (CPI), Australia, March 2022 (Canberra: ABS, 2022).

Selected Living Cost Indexes (SLCI)

The ABS calculates cost of living indexes for 4 distinct household types defined by their principal source of income. Each household type LCI is determined with reference to their individual spending pattern and they are only available at an Australia-wide level. The principal difference between CPI and LCIs is that LCIs include mortgage interest charges but do not include new house purchases, while the CPI includes the cost of new house purchases but does not include mortgage interest charges.

Consumer Price Index over time

While it fluctuated over the 20 years preceding the pandemic (March 2000 to March 2020) the annual CPI rose at an average annual rate of 2.6%. During the 2-year pandemic period (taken to be March 2020 to March 2022) the CPI rose 1.1% in the first 12 months, but 5.1% in the second.

This annual increase was the largest since the introduction of the GST which led to an annual increase of around 6% for the 4 consecutive quarters from September 2000. Prior to this, CPI had stayed above 5% for 17 years from September 1972 through to September 1989, except for a brief period when the introduction of Medicare (in 1984) significantly decreased the price of health care for the consumer.

High commodity prices and growing domestic demand in the latter stages of the global resources boom saw annual inflation rise to a peak of 5.0% in September 2008. Inflation then decreased dramatically following the onset of the global financial crisis with quarterly deflation of -0.3% in December 2008. By September 2009, annual inflation had reached a low of 1.2%.

A decrease in CPI occurred in the June 2020 quarter when it fell by 0.3%, 3 months into the pandemic period, principally due to the Australian Government subsidy of childcare costs.

As the CPI measures the cost to the consumer, government subsidies can have an impact on prices paid. During the pandemic, the Australian Government made childcare services free for families from 6 April to 12 July 2020. Consequently, the price of childcare for families dropped 95% in the June 2020 quarter but rose 1380% in the September 2020 quarter and then 38% in the December quarter 2020 when it returned to the longer-term trend. As childcare accounted for 1.2% of household expenditure at the time, the impact on total CPI was to record a 0.3% decrease for the year to June 2020.

Consumer Price Index by group

At the group level, the biggest increases in the last 12 months were for Transport (13.7%) and Housing (6.7%). The increase in Transport costs was a significant departure from the pre‑pandemic long-term trend of an average annual increase of only 1.8%.

Two groups for which costs decreased in the same period were Clothing and Footwear down 1.5%, and Communication down 0.8%.

Table 2            Long-term and short-term changes in CPI indexes, by group, March 2000 to March 2022

CPI group	Annual change in index (%)
	Long-term	Pandemic year 1	Pandemic year 2	Total 2 years of pandemic
	March 2000 to March 2020	March 2020 to March 2021	March 2021 to March 2022	March 2020 to March 2022
Food and non-alcoholic beverages	2.8	0.7	4.3	5.1
Alcohol and tobacco	5.4	7.9	1.8	9.9
Clothing and footwear	-0.1	0.0	-1.5	-1.5
Housing	3.7	-1.1	6.7	5.5
Furnishings, household equipment and services	0.9	2.7	4.9	7.7
Health	4.6	3.0	3.5	6.6
Transport	1.8	0.4	13.7	14.1
Communication	-0.4	-1.9	-0.8	-2.7
Recreation and culture	0.9	1.5	3.0	4.5
Education	4.8	-0.1	4.7	4.6
Insurance and financial services (a)	na	0.6	2.7	3.3
All groups CPI	2.6	1.1	5.1	6.3

(a) ‘Insurance and financial services’ as a separate group was only introduced to the CPI in June 2005.

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022).

 

Figure 1          Long-term and short-term changes in CPI indexes, by group, March 2000 to March 2022

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022).

Consumer Price Index by expenditure class

CPI groups are sub-divided into 87 expenditure classes. Expenditure classes are the lowest level groupings of similar goods or services for which price indexes are reported.

In terms of the recent annual rise in their price to the consumer, the top five expenditure classes were: Automotive Fuel; New Dwelling Purchase by Owner-Occupiers; Vegetables; Beef and Veal; and Other Non-durable Household Products (includes items such as light globes, toilet paper, tissues, garbage bags, batteries).

Table 3            Top 5 expenditure classes: increase in CPI, March 2000 to March 2022

CPI expenditure class	Annual change in index (%)
	Long-term	Pandemic year 1	Pandemic year 2	Total 2 years of pandemic
	March 2000 to March 2020	March 2020 to March 2021	March 2021 to March 2022	March 2020 to March 2022
Automotive fuel	3.0	-3.6	35.1	30.3
New dwelling purchase by owner-occupiers	3.4	1.2	13.7	15.0
Vegetables	3.7	-6.6	12.7	5.3
Beef and veal	3.8	8.4	12.1	21.5
Other non-durable household products	1.4	-1.0	11.8	10.7

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022).

Automotive Fuel

The price of Automotive Fuel fluctuates considerably (Figure 2) and in the last 5 years has ranged between dropping by 19% over a quarter (June 2020) to rising 11% (March 2022). Heavily dependent on global oil prices, the recent March 2022 quarter rise was attributed to an oil price shock caused by the Russian invasion of Ukraine in February 2022, paired with an ongoing easing of COVID-19 restrictions which strengthened global demand.

All CPI indexes are based on final cost to the consumer. From 30 March 2022 until 28 September 2022, the fuel excise rate will be reduced by 22.1 cents per litre. This would represent a 12% reduction in the cost of petrol across the 2 quarters (June and September 2022).

Figure 2          Quarterly percentage change in automotive fuel price index, March 2017 to March 2022

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022).

New Dwelling Purchase by Owner-Occupiers

In the March 2022 quarter, continuing strong demand for housing construction enabled builders to pass through increases in costs for both materials and labour. Fewer grant payments this quarter from the Australian Government’s HomeBuilder program and similar state-based housing construction programs also contributed to the rise in prices for the consumer.

Vegetables

Vegetable prices rose due to COVID-19 related supply chain disruptions and the high costs of transport and fertiliser. Flooding in production areas of NSW and Queensland also disrupted supply in early March, placing additional pressure on vegetable prices late in the quarter.

Beef and Veal

Meat and seafood prices have risen due to herd rebuilding in response to favourable weather conditions, reducing supply. Supply chain disruptions and high transport costs also contributed to the rise.

Other Non-durable Household Products

Grocery item prices have increased as supermarkets passed through supplier cost increases and reduced discounting activity in response to supply disruptions. According to the Reserve Bank of Australia, retailers have become more willing to accept price increases from their suppliers due to the broad-based cost increases their suppliers have faced, including for inputs, shipping, and packaging.

Other expenditure classes of interest

Electricity and gas

Prior to the pandemic the long-term trend in both household electricity and gas prices was similar at 6.0% and 5.9% per year, respectively. During the pandemic, electricity prices fell 11.2% in the first year and grew 3.5% in the second. Gas prices fell 1.4% in the first year but rose in the second year by 7.4%.

In the December 2020 quarter, the Western Australian Government introduced a $600 household electricity credit, resulting in a fall in electricity prices in Perth of 66.7%. In the March 2021 quarter, prices for utilities fell owing to declines in regulated electricity prices plus the introduction of state government rebates.

In the March 2022 quarter, Gas and Other Household Fuels’ prices increased by 4.4%, driven by a 10.9% rise in Melbourne largely due to annual price reviews that factored in rising wholesale and network costs.

Rents

In the June 2020 quarter rents declined for the first time in 45 years. The supply of properties available for long-term rental had increased since the outbreak of COVID-19 and the introduction of travel restrictions encouraged some landlords who were previously supplying short-term holiday accommodation to put their properties on the longer-term rental market. Around 5% of residential tenants successfully negotiated rent reductions in the quarter. In the March 2022 quarter, rents increased by 0.6% which was the highest quarterly increase since September 2014.

Coffee and tea

While not a significant proportion of household expenditure, the price of Coffee, Tea and Cocoa rose 8.2% in the last year in contrast to the long-term trend of only 0.8% per year.

The impact of cost of living increases on individual consumers will depend on their individual spending habits, for example takeaway coffee rising from $4 to $7.

Table 4            Selected expenditure classes: Increases in CPI indexes, March 2021 to March 2022

CPI expenditure class	Annual Change in Index (%)
	Long-term	Pandemic year 1	Pandemic year 2	Total 2 years of pandemic
	March 2000 to March 2020	March 2020 to March 2021	March 2021 to March 2022	March 2020 to March 2022
Rent	3.0	-1.4	1.0	-0.4
Electricity	6.0	-11.2	3.5	-8.1
Gas and other household fuels	5.9	-1.4	7.4	5.9
Coffee, tea and cocoa	0.8	-0.9	8.2	7.2
Motor vehicles	-0.9	5.7	6.6	12.6
Tobacco	9.7	16.8	3.0	20.3

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022).

 

Figure 3          Index increase and contribution to CPI, selected expenditure classes

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022).

 

Figure 4          Index value by quarter, March 2002 to March 2022, selected expenditure classes

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022).

Weighting and averaging of household expenditure

Households do not spend equal amounts on each expenditure class, so the CPI applies weightings to price rises according to the proportion of total household expenditure each class represents.

For example, Transport costs rose 13.7% but represent 10.6% of average household expenditure, so accounted for a 1.6% rise in total household costs.

In contrast Coffee, Tea and Cocoa rose 8.2%, but as it only represents 0.2% of household expenditure, accounted for only a 0.4% rise in total costs.

The CPI can only measure average household expenditure across all households and cannot account for varying expenditure on different expenditure classes. For example, if the price of new motor vehicles increases, there is no impact on a household that did not purchase a new vehicle in the period; however, the CPI can only measure the impact as if the price increase for new vehicles were averaged across all households.

Figure 5          Top expenditure classes contributing to CPI Increase, March 2021 to March 2022

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022).

Selected Cost of Living Cost Indexes

The ABS Selected Living Costs Indexes (SLCI) are useful in understanding levels of inflation within selected household types defined by their main source of income.

Household type / SLCI	Principal source of income
Employee households	Wages and salaries;
Age pensioner households	Age pension or veterans’ affairs pension
Other government transfer recipient households	A government pension or benefit other than the age pension or veterans’ affairs pension
Self-funded retiree households	Superannuation or property income
Pensioner and Beneficiary Living Cost Index	Age pension or veterans’ affairs and other pension government pension or benefit combined

Australian Government payments such as the Age Pension, Service Pension and the Disability Support Pension are regularly indexed by the greater of the movement in the CPI or the movement in the Pensioner and Beneficiary Living Cost Index (PBLCI).

SLCIs include interest charges but do not include new house purchases, while the CPI includes cost of new house purchases but does not include interest charges.

The most notable variations in household spending patterns are:

• Age Pension households spend a greater proportion on ‘Health’ compared to the average Australian household (12.2% versus 6.5%), but less on ‘Education’ (0.2% versus 4.6%).
• Employee households spend a greater proportion on Insurance and Financial Services (9.5% versus 5.8%) as this includes home mortgage and credit interest payments.
• Employee households spend a lesser proportion on Housing (15.1% versus 23.2%).

Table 5            Proportion of household expenditure allocated to selected expenditure groups, SLCI and CPI, 2021

Household type	Expenditure group	Cost of living index	CPI	Difference
		Percentage of expenditure	Percentage of expenditure	(Percentage points)
Age Pension	Health	12.2	6.5	5.7
Other Govt Transfer Recipient	Alcohol and Tobacco	12.7	9.0	3.7
Employee	Insurance and Financial	9.5	5.8	3.7
Age Pension	Housing	20.3	23.2	-2.9
Age Pension	Education	0.2	4.6	-4.5
Employee	Housing	15.1	23.2	-8.1

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022).

Comparing the movement in Cost of Living Indexes and the CPI

Over the long-term, the trends are similar with SCLIs rising at a slightly higher annual rate than CPI for Other government transfer recipient households (2.8%), and Self-funded retiree households (2.9%) but slightly lower for Employee households (2.4%) and Age pensioner households (2.5%)

• In the most recent year all SLCIs rose at a rate less than that of CPI, with the lowest increase being for Age pensioner households at 3.8% and highest for Other government transfer recipient households at 4.9%.

These differences principally reflect the treatment of housing and interest costs between the 2 types of indexes.

Table 6            Long-term and short-term changes in SLCI and CPI indexes, March 2002 to March 2022

Household type	Annual change in index (%)
	Long-term	Pandemic year 1	Pandemic year 2	Total 2 years of pandemic
	March 2000 to March 2020	March 2020 to March 2021	March 2021 to March 2022	March 2020 to March 2022
Employee households	2.4	0.6	4.6	2.6
Age pensioner households	2.5	0.0	3.8	1.9
Other government transfer recipient households	2.8	0.5	4.9	2.7
Self-funded retiree households	2.9	0.7	4.3	2.5
Pensioner and Beneficiary Living Cost Index	2.6	1.3	4.4	2.8
All Groups CPI	2.6	1.1	5.1	3.1

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022).

Price rises compared to income

To properly assess the impact on cost of living, price increases need to be assessed in the context of household income. If household income does not increase in line with inflation, then wages are said to be decreasing in real terms. The ABS also produces the Wage Price Index (WPI) which measures changes in the price of labour.

While over the previous 20 years the WPI has generally kept pace with CPI, since the June 2021 quarter, CPI increases have out-weighed WPI increases.

In the March 2022 quarter, the WPI annual increase for Australia was 2.4% compared with the CPI of 5.1%.

Figure 6          Annual change in Wage Price Index and Consumer Price Index, by quarter, March 2002 to March 2022

Source: ABS, CPI, Australia, March 2022 (Canberra: ABS, 2022); ABS, Wage Price Index, Australia, March 2022 (Canberra: ABS, 2022).

Further reading

'Consumer Price Index', Australian Bureau of Statistics, March 2022.

'Selected Living Cost Indexes', Australian Bureau of Statistics, March 2022.

'Wage Price Index', Australian Bureau of Statistics, March 2022.

Reserve Bank of Australia (RBA), Statement on Monetary Policy, (Sydney: RBA, 2022).

Ian Zhou, ‘Cost of Living Measures’, Budget Review 2022–23, Research paper, (Canberra: Parliamentary Library, 2022).

Joel Gibson, $7 for a Coffee?, Sydney Morning Herald, 23 March 2022, 2.

Michael Klapdor, ‘Why Most Pension and Benefit Rates Will Not Be Increased in September 2020’, FlagPost (blog), Parliamentary library, 24 August 2020.