Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Monday, 11 July 2016

Misery?

Woe!

A blog reader told me last week that apparently Australia's "misery index" is rising fast!

Yikes!

I mused this for a while, but then thought that it sounded suspiciously like rubbish.

So I ran some numbers.

The concept of the misery index was first coined by economist Arthur Okun, and is calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate.

Therefore, in theory at least, it tracks how tough life is for the average citizen.


As I suspected - it was rubbish. The index has been falling. 

With good reason, Okun's misery index attracted some criticism for being somewhat over-simplistic.

In the late 2000s economist Steve Hanke created a modified misery index, which added the unemployment rate to the annual rate of inflation and the interest rate, less the annual growth in GDP per capita. 

A similar concept, but in addition to unemployment and cost of living pressures, it also takes into account the rate of interest, which is a factor that impacts most homeowners these days. 

I've used the cash rate here - but you can equally use mortgage rates, and the line plots a very similar path.



Any reading in single digits is a remarkably low result. 

Of course, Australia has low interest rates, low inflation, and, recently, a falling unemployment rate.

Meanwhile GDP per capita growth is tracking at a very healthy 1.7 per cent. 

Hanke's modified misery index is at its lowest level on record.