Cheap Shot

The real CPI: cars cheap, food a luxury

Matt Wade Economics Writer
September 18, 2006

IF YOU have a weakness for electronic gadgets or new cars it's been a tempting decade. Prices for TVs and computers have fallen 68 per cent, small electronic goods 14 per cent and vehicles 19 per cent since 1996. But it's a different story for many of life's basics.

Fruit and vegetables, health services, public transport, child care and even bread have been rising much more quickly than the overall rate of inflation.

During the past decade fruit prices are up 112 per cent, vegetables 70 per cent, health care 50 per cent, public transport 49 per cent and bread 48 per cent. Child care has risen an eye-popping 91 per cent since 1996.

In that time, however, the average increase for all 90 goods and services that make up the official inflation measure - the consumer price index or CPI - has been just 29.6 per cent.

A report, "Let them eat cake - How low-income earners are disavantaged by the consumer price index", claims the disparity in price changes between many essentials, like a loaf of bread, and many non-essentials, like plasma TVs, reveals shortcomings with the CPI.

The CPI is not an accurate guide to the cost of living and underestimates the impact of inflation on low-income families, including many retirees, it says.

"Families who spend relatively more than average on food have experienced a more rapid cost of living rise than suggested by the CPI while the cost of living for those families that spend heavily on new cars and electrical appliances has risen more slowly than indicated by the CPI," the report, commissioned by the Australian Greens, says.

The Greens' leader, Bob Brown, said the report highlighted the need for a new cost of living index to be developed to complement the CPI, which ignores the cost of interest rate payments and the land which houses are built on.

"The CPI has its uses, but the Bureau of Statistics is the first to concede that it is no longer a cost of living index. It is time that the Government funded the bureau to construct a proper cost of living index that includes the costs of mortgage interest, the cost of land, and focuses more on the costs of the essentials that low-income earners rely so heavily upon," he said.

The CPI has become the most closely watched economic indicator since the Reserve Bank was formally charged with managing interest rates to keep inflation between 2 and 3 per cent in 1996.

When the June quarter CPI showed inflation had reached a decade-high 4 per cent - excluding the one-off price spike following the introduction of the GST - the bank increased interest rates a week later. Many economists believe it will lift rates again in early November, soon after the next quarterly inflation figures are released in late October.

Since the bank's inflation target was introduced, the cost of mortgage interest was removed from the CPI to tailor it to the needs of managing interest rates.

Senator Brown said the CPI was masking how low-income earners were being hit by inflation.

"A major problem with relying on the CPI as a measure of the cost of living is that it averages out the differences in a wide range of costs. The Treasurer might think cheaper electrical appliances help balance out more expensive fruit and vegetables when he is talking about inflation, but struggling families are unlikely to substitute one for the other," he said.

Troublemaking Greens, why can't they leave the Howard voters feeling relaxed and comfortable.

and other rhetorical questions