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Thursday, 30 July 2015

Cost of living...improves!

It seems that the cost of living hasn't affected its popularity, as the old quip goes.

And, in fact, in some apparently rare good news on the cost of living in Australia, it has actually been improving for some time!

The ABS released its Cost of Living Indexes for the June 2015 quarter, which showed that the cost of living for most households has improved substantially since 2011.

The cost of living for employee households rose by 0.4 per cent in the June quarter to be just 0.9 per cent higher over the year.

By comparison wages have grown by 2.3 per cent over the same period.

Other types of household have also seen only a moderate increase in the cost of living over the past year.

Naturally enough falling interest rates have played their role here.

It's often argued that the Consumer Prices Index doesn't reflect the "true" increase in the cost of living.

However, this appears to be false.

Considered research by the Reserve Bank suggested that this sense that "the numbers must be wrong" is likely driven by a range of psychological biases.

These include loss aversion (meaning that we become agitated by rising prices, but fail to notice goods which become equivalently cheaper), our failure to recognise improvements in life quality, and often an undue focus on good which we purchase more regularly (such as fuel).

"The continued concern about living cost pressures might arise because the standard of living that can be sustainably afforded by households’ incomes remains lower than many would like."