Wednesday, July 17, 2013

Crying poor over Australia's riches

It looks like the dreaded cost of living lurgy is being played for all it's worth by both sides of politics in the race to win the 2013 election.
In Australia in 2013 it is a hollow argument designed to play into the fears that some in the electorate have about how tough it is to make ends meet. It is an easy issue for lazy politicians to run with because it feeds into the money illusion that so dominates the mindset of the unthinking public that the price of everything is going up and up and up and that nothing else changes.
There is no doubt that prices do go up and up which is actually a good thing. Deflation is rare and when it happens it is insidious, which is why the Reserve Bank of Australia has a target for prices to go up by between 2 and 3 per cent each and every year.
The Reserve Bank has done an absolutely terrific job meeting that target over the past 20 years with average annual increases a tick away from 2.5 per cent.
Ten out of ten for the Reserve.

What is almost always forgotten in the sloppy cost of living mantra is the income side for consumers. This obviously needs to be considered as it represents the householder's ability to pay for the goods and services where prices are rising by an average of 2.5 per cent per annum.
In other words, if prices are rising at 2.5 per cent and incomes are rising by 2.5 per cent, the cost of living pressures are zero. The average person can buy exactly the same quantity or volume of goods and services as they did the year before. No more, but certainly no less.
There is no erosion of living standards or householders 'doing it tough'.
Over the last three, five and 10 years – take your pick – income growth has exceeded inflation. This means that for a given basket of goods or services, the average wage earner can either buy more of those items with their weekly wage or if they buy the same amount as before, they have money left over in the form of savings which they can put towards nice-to-do things.
It is a goal of policy, that is spoken of too infrequently, to boost real wages or incomes so that living standards can rise.
The key fact is that inflation has been lagging behind the growth in incomes which means it is not possible to have cost of living pressures in aggregate. Indeed, Australia has not had an episode in more than 20 years where real wages have fallen.
The rising income momentum over the last two decades is why Australia's per capita income is just about the highest in the world. In US dollar terms only the economic minnows Luxembourg, Qatar, Norway and Switzerland have higher per capita incomes.
Even in purchasing power parity terms, Australia has the ninth highest per capita GDP in the world with only one of those nine countries, the US, having a population greater than 10 million.
That said, there are no doubt many people who, when they grab their skinny flat white on the way to work, or have the $80 a month taken from their account to cover the cost of pay TV or go out for that chicken tikka masala because they don't feel like cooking, are feeling a financial pinch.
For these people, the 'cost of living' issue may be a 'price of consumption choices' problem and should be dismissed in the same way a petulant child demands a treat or two. Scaling back consumption patterns in these circumstances would do wonders for perceptions of cost of living pressures.
A few other issues are relevant when judging the shape of household finances. Importantly, the saving rate has been around 10 per cent of income for the last four years, having plummeted to around zero in the height of the consumption frenzy in 2006.
Households are also very wealthy. In the March quarter 2013, net household financial wealth per capita hit a record high of almost $76,000 which is up a thumping 22 per cent from a year ago. According to estimates from Commsec, per capita wealth has risen a staggering 103.7 per cent over the past decade.
In other words, the troublesome cost of living pressures have occurred despite a huge rebuilding in savings and a surge in wealth.
All of which suggests the cost of living debate is a fear issue, fuelled by focus groups who feed their fears to all sides of politics. It is not factually based and the sooner it stops, the better, as people might actually realise that the average Australian is one of the richest peoples in the world, even if that café latte is a little expensive.

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