CPI delivers real increases to the pension

Article published 4 November 2022

CPI delivers real increases to the pension

WITH the release by the Australian Bureau of Statistics of the living cost indexes this week, an unusual trend has emerged.

The rolling twelve-month inflation rate (CPI) now stands at 7.3 per cent. However, the living cost index (PBLCI) used in pension indexation stands at 6.4 per cent.

Now, remember that in pension indexation the higher of the CPI and the PBLCI gets used.

Why is the CPI outstripping the PBLCI good news?

The PBLCI tells you by how much pensioners’ cost-of-living has gone up. In compiling it, the Australian Bureau of Statistics excludes, or give a lesser weight to certain categories of expenditure. These are categories of goods and services which pensioners generally don’t use or don’t use as much and therefore don’t buy.

For example, most pensioners own their home and don’t pay rent. Rents have skyrocketed and have had a big effect on the CPI.

Unlike a previous version of this article assumed, mortgage repayments are not included in the CPI. However, the price of building new houses is and it’s gone up strongly.

If the stars align on 20 March and 20 September (when pension indexation is applied), and the six-monthly CPI increase is significantly higher than the six-monthly PBLCI increase, pension indexation produces an actual increase in pensioner purchasing power.

It doesn’t happen very often. Out of the 58 quarters since the PBLCI started to be used, the CPI came out higher than the PBLCI on 25 occasions, but only 7 of those occasions coincided with, and were useful for pension indexation.

But out of the last four pension indexations, three were of the kind where the CPI increase was much more than the PBLCI increase.

Combined those three indexations have delivered an increase in purchasing power of about $15 a fortnight for singles and $23 per fortnight for couples since March 2021.

While this is good news, it’s not good enough. Once these increases in purchasing power are offset against the money pensioners had to (and have to) find while they’re waiting for pension indexation, there will still be a significant net loss of purchasing power.

This is the reason why, particularly in times of high inflation, pension indexation needs to occur more frequently.

 

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