I've long been a believer that CPI in Australia, as measured by the ABS, has lagged actual cost of living increases by a percentage point or two. My belief was founded in the long-standing fight that recipients of the military pension I receive about it 'only' being indexed to CPI and should be indexed to wage growth instead.
While victory was achieved in changing this after the last federal election, with the change of the aged pension back to CPI indexation (from wage growth) and pretty much every other government pension being indexed to CPI, I believe the writing is on the wall for my pension to go back to being indexed the way it was.
I was all ready to get indignant about this, then I thought I'd go out and see what facts there were about CPI versus actual cost of living increases and came across the following paper from the RBA produced in Mar 2014:
http://www.rba.gov.au/publications/bulletin/2014/mar/pdf/bu-0314-4.pdfIn short, the paper says that CPI over the last 10 years has actually tracked cost of living pretty well across various demographic groups and, if anything, overstates it slightly due to the effects of substitution bias and incomplete quality adjustments. As a result, wage growth has actually outstripped cost of living inflation by around 25% in real terms, strongly indicating that lifestyle inflation is really what's at play. Of course, many of us, myself included up until now, don't see it that way because of a few key psychological biases we all tend to have (eg. tendency to only notice price increases, particularly large periodic ones, of items we purchase frequently rather than decreases), but the facts are the facts!
Anyway, I think it is a well written paper based on seemingly reputable sources and facts and has certainly made me think that a life of CPI indexation for those fortunate enough to have a government pension will be no big issue to any of us lifestyle inflation resistant Aussie mustachians around here. Even for those without a pension, basing your SWR on CPI rather than wage growth is likely to give you a percent or so more headroom in your calculations, so a win there too.
What do other Aussies think of it? Beyond the psychological biases covered, does anyone have any solid evidence to the contrary of what is presented in this paper?