The latest cost of living figures released by the Australian Bureau of Statistics show that across all household types, the rise in the cost of living remains desperately weak. While this by itself is good news, it underscores the complete lack of demand in the economy at the moment, which is in turn producing weak growth in household income.

Cost of living is a rather interesting economic bit of data which rarely agrees with people’s perceptions. For example, there is little doubt that electricity prices did fall when the carbon price was removed, and yet, as Lenore Taylor reports, 60% of people believe it had no impact on their electricity bills.

Across Australia, when the carbon price was removed, electricity prices fell by about 8%. But in the past nine months prices have started to rise again – they’re up 4.5%:

So even while the ACCC may have calculated “direct cost savings, ranging from $153 to $269, that have been passed through to customers by electricity and natural gas retailers”, people are not likely to perceive any great savings. Prices have risen in the past nine months and a big bill remains a big bill.

That’s why politicians will never belittle talk of cost of living rises. However, the reality right now is that cost of living is rising about as slowly as we have ever experienced.

In the past 12 months employee households saw their cost of living rise by just 0.9%, the same for age pensioner households. For self-funded retiree households, the cost of living rose by 1.2%, and for households on non-age pension government benefits it rose by 1.1%:

The reason for the differences in cost of living is because the ABS calculates different spending habits for households according to the main source of their income. While the CPI figures attempt to establish an average for all households, the cost of living figures recognise that, for example, employee households have different spending habits from that of age pensioners.

Thus, the main reason self-funded retirees saw a bigger cost-of-living increase than employees was that, as they are more likely to have paid off their home, they get less benefit from a cut in interest rates. Similarly, as they spend more on transport than age-pensioner households they were hit more by increases in petrol prices.

The big difference between inflation and cost of living figures is the treatment of housing. In the CPI the price of owner-occupied housing is counted (worth 8.7% of the total basket of goods and services included in the CPI figures) but it doesn’t consider the cost of mortgage repayments.

In the cost of living figures, house prices are excluded (because most people don’t buy a house each year, and whether or not the value of your house goes up really doesn’t affect your cost of living in a direct sense), but it does include interest charges – including mortgage repayments.

Thus, during the period where the RBA was slashing rates, the cost of living for employee households (which are the most likely to have a mortgage to pay off) fell faster than other households despite house prices and rents also rising:

And because housing price rises were a major contributor to the increase in the CPI, it’s not surprising that for the first time since 2013, all households saw their cost of living rise by less than the official inflation figure:

But while low cost of living rises is good, it doesn’t immediately translate into good times because it only looks at one side of the ledger. Costs might be rising slowly, but what about income?

As we know, wages have been rising by less than ever before:

The balance of rising income and cost of living determines whether or not our living standards have risen or fallen.

And in the past year our incomes have risen weakly, but because of the near-record low growth in the cost of living our overall standard of living has risen.

But only just.

The National Centre for Social and Economic Modelling (Natsem) earlier this week released its latest quarterly household budget report.

It found that income growth in the past year was lower than average but was offset by lower cost of living increases (Natsem uses a different measure from the ABS, but they yield generally similar results).

Thus, living standards in Australia did rise in the past 12 months, but by just 1.1% or “little more than half the long-term trend of around 2%”.

Standard of living increases are always welcome, but much like increases in cost of living, they often don’t gel with people’s intuition.

Weak income growth but even weaker of cost of living, might lead to a technical increase in standard of living, but it is such a low level as to be barely noticeable unless you were paying very close attention.

And that pretty much is the story of Australia’s economy at the moment – yes, going by the data it is growing, but you’d hardly know it when you look around in your day to day life.