The Consumer Price Index (CPI) is a measure of the change in the level of price on a basket of consumer goods and services that may be purchased by households. This is a measure we come across in discussion on financial matters on a daily basis. It is often spoken about in the same breath as the client’s projected cost of living.
CPI is often linked with retirement income outcomes, and is mentioned as a major factor when planning for the future.
For the year to June 2017, the CPI increase is 1.9%, meaning that on average across that basket of goods and services, prices have increased by this amount. This measure will assist the Government and the Reserve Bank of Australia (RBA) in guiding monetary policy.
But what relevance does the CPI have for individuals and their cost of living?
Keeping in mind that the CPI is an average measure across a number of sectors, across a number of goods and services, some of which may not at all be used by the individual (such as tobacco which increased substantially over the last 12 months, largely due to new taxes), the application of this increase in cost of living to the individual may be (and usually is) irrelevant.
Depending on your stage in life, your habits, your lifestyle, there will be increases (and decreases) in your cost of living. Being able to source cheaper goods on the internet from what may be in-store is also not able to be incorporated in this measure, and forms a major part of our economy.
From our point of view, the biggest increases in the cost of living for our clients are changes in lifestyle. Maybe a holiday or a new car. Maybe some renovations. Financial dependants may no longer be dependant, or they may suddenly become dependent again when they move back into the family house unexpectedly.
We strongly encourage our clients to determine what their cost of living will be, and we review and discuss on a regular basis what increases may be expected over time. We believe it’s lazy to leave this decision to a product manufacturer (like an annuity), or a complicated software calculation model that spits out a projection based on a CPI increase over time.
For those fortunate enough to have secured their financial positions, your cost of living and the increases that may occur over time is a function of your life choices, not a generic broader measure used by Government agencies and product providers to produce outcomes that are non-specific to your situation.