The rising cost of living has become a big, if not the biggest, concern for most Australian households. The usual measure of the rising cost of living is the Consumer Price Index (CPI) and the most important version of the CPI, at least as far as the RBA is concerned, is the quarterly measure, rather than the newer monthly measure. According to the most recent Q1 2024 CPI prices rose 1.0% q-o-q with an annual inflation rate of 3.6% y-o-y, down from 4.1% in Q4 2023 and a peak inflation rate of 7.8% in Q4 2022. Based solely on the quarterly CPI, while the general cost-of-living is rising at a much lower pace than it was the rise is still uncomfortably high at 3.6% and most people, according to surveys of inflation expectations think inflation is rising nearer to 4.5%.

The discrepancy between the most recent annual inflation rate based on the quarterly CPI and the pace at which people feel inflation is rising can be explained by several factors. The first factor is that annual CPI inflation probably stopped falling in Q2 2024 for the first time since the beginning of 2023. The monthly CPI shows annual inflation at a low point of 3.4% y-o-y in February 2024, then rising to 3.5% in March, 3.6% in April and 4.0% in May. It is likely that the Q2 2024 CPI when released later this month will show annual inflation rising from the 3.6% Q1 result closer to 4.0%, but still not as high as most people feel inflation is travelling.

A second factor helping to explain the discrepancy is the way the CPI is collected. The Australian Bureau of Statistics collects prices of a basket of goods and services and weights those prices according to the survey of household expenditure. The weights are representative of total spending by Australian households, but not of any particular household. The ABS do provide additional cost of living indexes representing different types of households recognising that what employee households spend their money on is different from say an age pensioner household and the weights on the items in the basket of goods and services should differ accordingly.

These broad household categories experienced different cost of living or inflation in Q1 2024 compared with the CPI (+1.0% q-o-q, +3.6% y-o-y). The biggest household group, employee households, experienced the highest rise in their cost of living in Q1, up 1.7% q-o-q, 6.5% y-o-y, materially higher than the CPI rise. Employee household cost of living peaked later than the CPI in Q2 2023 and higher than the CPI peak at 9.6% y-o-y. This group has a higher weighting to mortgage interest charges than in the general CPI and mortgage interest charges rose by 7.0% q-o-q, 35.3% y-o-y in Q1 2024. Mortgage interest rate charges peaked at 91.6% y-o-y in Q2 2023.

Employee households were not alone experiencing a higher cost of living rise in Q1 relative to the 1.0% q-o-q CPI rise. Pensioner and beneficiary household cost of living rose 1.3% q-o-q: other government and transfer payment recipient households, up 1.4% q-o-q and age pensioner household, up 1.1%. The only group among the five household groups covered by the ABS experiencing a cost-of-living increase less than the CPI increase in Q1 was self -funded retirees, up 0.7% q-o-q and 3.4% y-o-y. This group has a higher weighting to holiday travel and that was one of the lower inflating items in Q1 2024.

The significantly higher than CPI inflation being experienced by employee households helps to explain why many feel the cost-of-living crisis is worse than indicated by the CPI.

Another factor is that every household spends differently than on weightings in the baskets of goods and services contained in the CPI or the five different household cost of living indexes. The CPI contains 11 broad spending categories with many separately weighted items within each broad category. Five of the broad spending categories, housing 21.74% weight in the CPI in 2024; food and non-alcoholic beverages, 17.15% weight; recreation and culture,12.55% weight; transport, 11.42% weight; and furniture, household equipment and services, 8.43% weight account for 71.29% of the total CPI.

These five broad CPI categories experienced annual price increases in Q1 2024 between -0.2% y-o-y for recreation and culture and 4.9% y-o-y for housing. At this broadest weighting level, a household spending relatively more on housing than 21.74% of their budget would sense a greater cost of living pressure than indicated by CPI inflation. Cutting inside the broad housing component the separate weights of 6.03% for housing rent and 8.07% for housing purchase are way below the proportions that most renters are paying, or home buyers are paying on mortgage interest. It is worth noting that housing rents were up 7.8% y-o-y in Q1 2024 while mortgage interest rate charges were up 35.3%.

Returning to the 11 broad CPI categories, six showed annual price rises above the 3.6% y-o-y CPI increase in Q1 2024, food and non-alcoholic beverages, 3.8% y-o-y; health, 4.1% y-o-y; housing 4.9% y-o-y; education, 5.2% y-o-y; alcohol and tobacco, 6.3% y-o-y; financial services and insurance, 8.2% y-o-y. These are all categories where many households are likely to have spent more than the weights apportioned to the categories in the CPI and account for why most households perceive that inflation is running higher than where the Q1 CPI indicated at 3.6% y-o-y or the most recent monthly CPI for May is indicating at 4.0% y-o-y.

When the Q2 CPI is released later this month, it will not only be an issue that measured annual inflation is likely to lift from where it was in Q1, it will also be an issue that most households are experiencing an even higher rise in cost of living than the CPI is showing and that may be what they expect in terms of increases in compensation from their employers or relief from the government.