Cost-of-living statistics are valuable; the ‘noise’ is not Quarterly statistics would seem to be bread and butter for Australia Institute senior economist Matt Grudnoff, but he has a cautionary tale.
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tatistics can be a powerful tool to give us insights into complicated issues. But, there’s a famous phrase that goes: ‘There are three kinds of lies: lies, damned lies and statistics.’ So, how do you avoid being fooled? This edition of the Retirement Affordability Index provides a great example. The change in the timing of when the Retirement Affordability Index is published has meant that there have been two quarters of CPI data since we last talked about retirees’ cost of living. While it wasn’t planned this way, it was probably the best two quarters to combine in this analysis. Why? Because the June and September quarters saw massive quarterly movements – June 2020 saw the biggest fall ever and September had one of the biggest increases in the past 20 years.
Looking at both quarters together, we can see that the cost of living for retirees has fallen, not risen as the September data would have us believe.
“But there is a problem at the heart of all attempts to measure inflation and cost of living. The measurements become less accurate if there is a sudden change in households’ spending patterns and the changes in spending are on items that have seen big changes in price.” The recession, the shutdown and the government’s response to it were the drivers for these big changes. The two biggest were: • the government making childcare free in the June quarter (and then making it expensive in the September quarter) • fewer people travelling in lockdown causing the fall in petrol prices in the June quarter, followed by the increase in petrol prices as states opened up again in the September quarter. Movements in our six RAI cohorts are a good example. The figure below shows the movement in June 2020 when prices fell. It also shows the movement in September 2020 when they all rose again.
Sounds exciting right? Well, movements in quarterly data are beloved by commentators who are always keen to weave a story out of those changes. But these two quarters have moved in roughly opposite directions. This means they have largely offset each other. The June quarter Consumer Price Index (CPI) went down a massive 1.9 per cent, while the September quarter jumped back 1.6 per cent. Both movements were entirely predictable. Indeed, I did just that in my last Retirement Affordability Index article, Is deflation good news for your living costs? I wrote: “The Retirement Affordability Index – and its six tribes with six different spending patterns – allows retired households to find a spending pattern that more closely matches their own and thus gives them the most accurate inflation rate. 8
The big decreases and increases are not as important as the net change over the two quarters. The real question is, was the fall in June bigger or smaller than the increase in September? The next figure (on page 9) shows just that. We see that the falls were bigger than the increases. This is the real story that could get lost in the quarter-by-quarter movements.
YourLifeChoices Retirement Affordability Index™ November 2020
