The cost-of-living measures how much money it takes to buy necessary items.
COVID-19 has driven up the cost of living in Australia.
Housing costs, petrol prices, and groceries are 2022’s biggest expenses.
64% of Australians are anxious about the rising cost of living.
What is the cost of living?
How much does it cost to live in Australia? It’s not just a high school economics question. In fact, the cost of living has an enormous impact on your personal finances.
Economists gauge how much it costs to live somewhere by using a few different metrics, such as the cost of basic necessities, whether people can afford those costs, and how changes in those costs affect different groups of people.
Since the cost of living can vary, it’s important to understand how it affects your personal financial situation – and better still, what you can do about it.
How much does it cost to live in Australia?
It depends! The cost of living is the amount of money it takes to afford basic and necessary expenses, such as:
Food
Housing
Transportation
Healthcare
Utilities
Taxes.
These costs can be a useful comparison tool, since they vary depending on time period and where you live in Australia. Someone living in a capital city, for example, won’t have the same cost of living as someone in a regional area.
However, because the cost of living varies so much around the country, it’s a little difficult to pinpoint exact prices.
For example, the Department of Home Affairs requires international students to demonstrate they can cover living costs of at least $21,041 per year (or $1,754 per month), though this number is more reflective of living costs back in 2019.
Meanwhile, collaborative database Expatistan estimates the current cost of living for a single person in Australia is actually an eye-watering $3,655 per month. (Yikes!)
Generally, a higher cost of living means that basic expenses have become – well, expensive. This especially impacts low-income households, since they have to spend a larger part of their budget on non-discretionary items like food or petrol. If prices rise, low-income households feel it the most.
Cost of living is therefore crucial to consider when it comes to personal finances, as it shows us how the larger economy affects our individual circumstances.
Cost of living vs. standard of living
Standard of living describes the level of wealth, comfort, and necessities available to someone based on their socioeconomic status and location. Cost of living, on the other hand, only describes the price of basic necessities.
Many factors go into measuring the standard of living, such as:
Life expectancy.
Inflation rate and national economic growth.
Poverty rate and class disparity.
Infrastructure.
Political and social freedom.
Environmental quality and climate.
Income and employment opportunities.
Access to affordable and quality housing, healthcare, and education.
Because of this, standard of living is usually a far more comprehensive measure of someone’s circumstances than cost of living.
Standard of living differs widely along socio-cultural lines, too, such as race, gender, sexuality, ability, and age. It can even give us an idea of someone’s “quality of life”, or subjective happiness.
However, cost of living is still a very important factor in understanding how we live. If someone faces a higher cost of living, it follows that their standard of living – and quality of life – might also be impacted.
Therefore, when it comes to saving money and maintaining a good standard of living, basic costs are a crucial part of the equation.
How do we measure the cost of living? The consumer price index explained
The Australian government evaluates the cost of living through a few numbers, mainly the Consumer Price Index (CPI), Living Cost Indexes (LCIs) and the Wage Price Index (WPI). These statistics all sound similar, but they have different and important meanings.
“Index” to an economist means “change in value”. Therefore:
CPIs measure the change in value of consumer goods and services (like food or healthcare).
LCIs measure the impact of changing values on different kinds of households – in other words, how much money a household needs to spend to maintain their standard of living.
WPIs measure the changing price of labour, or fluctuating household incomes, in a few different standardised sectors.
For example, let’s say the price of food goes up. This will drive up the corresponding CPI, since there has been a positive change in value. However, this increase will hurt a pensioner with a fixed income a lot more than a young worker with a disposable income. Therefore, the LCI will show different expenditure increases for pensioners and young workers as a result of the same CPI increase.
It’s important to keep in mind that price jumps in consumer goods won’t hurt people’s finances so long as wages go up, too. Economists then keep a good idea on how wage growth (WPIs) compares with the CPI. That way, we can see if households have the ability to keep pace with inflation.
In summary, by studying the relationship between the CPI, LCI, and WPI, we can see which groups face additional financial pressure due to price changes in the economy, and how this impacts their cost of living.
Are we paying more for everyday items? Why the consumer price index matters
The consumer price index (CPI) gives us a crucial part of the picture when it comes to affordability, inflation, and the cost of living.
Generally, if the CPI rises faster than households can keep up, then it makes the cost of living really expensive – and for some Australians, unaffordable.
Between September 2021-2022, headline inflation in Australia appears to have risen by a mind-boggling 7.3%, with the cost of non-discretionary items (which low-income Australians spend most of their incomes buying) spiking by 1.8% in the September 2022 quarter alone.
Meanwhile, wages appear to have only risen by 3.1% over the same period This means that the price of goods grew way faster than salaries – a sure sign that households have lost some of their purchasing power.
The CPI isn’t a perfect metric. In Australia, the federal CPI doesn’t take into account costs like regional prices nor the purchase of established houses. This means that some of the true cost of living pressures faced by Australians aren’t reflected in official statistics.
However, the CPI remains an important tool for judging rising prices in the economy, which can help consumers make decisions about how (or if) they can save money.
How do price changes affect you?
Let’s break down how price changes in everyday, non-discretionary items could affect your finances.
Home costs
Homes are by far the most draining item on your bank account. Whether you’re paying rent, a mortgage, or simple utility bills, spending money on housing is non-negotiable.
However, if you’re spending more than 30% of your income on housing, you’re considered to be under “housing stress”, whether that’s making mortgage repayments or rent. This is one of the key benchmarks the Australian government looks at when gauging housing affordability.
Some of the home costs that could easily be affected by changing CPIs include:
Utilities like electricity, phone, and internet
Rent
House prices
Mortgage repayments
Home insurance premiums.
All of these expenses can change based on the fluctuating economy.
Car costs
Thankfully, a decent public transportation system means that Australians don’t always have to cough up for a car. But for those who do, here are the crucial expenses that can change with the economy:
Petrol
Vehicle prices
Registration costs
Car insurance premiums.
For example, the price of petrol skyrocketed alarmingly fast in 2021, with a CPI hike of 11% in March 2022 alone (the highest rate increase since the 1990 Gulf War).
This jump has ripple effects for all vehicles, too, not just personal ones. We may see rises in the costs of public transport, air travel, and even online deliveries in 2022, making car costs an important CPI to watch this year.
Food & beverage
Grocery shopping is an obvious must, so changing food/beverage prices have an immediate impact on everyone. Even a ten-cent hike in milk prices accumulates over time, contributing to food deserts in both major cities and regional areas.
Some food groups that have spiked in 2022 include:
Dairy products, like milk and cheese.
Canned goods, like baked beans and tinned spaghetti.
Wheat, rice, fats, and oil. (This also includes ancillary products like biscuits, bread, and beer).
Fresh fruits and vegetables, specifically bananas, tomatoes, zucchinis, beans, cucumbers, avocados, and mangoes.
Red meat, like beef and lamb.
Pricing people out of good quality foods can also give them poor nutrition. This contributes to significant (and pricey) chronic health risks in the long-run and worsens their standard of living.
What are our biggest expenses in 2022?
If you’re struggling to save, you’re not alone. Here are a few critical expenses eating into people’s budgets in 2022, and how you can manage them.
While you’re at it, consider brushing up on your understanding of monetary policy: this can help you read the economy and prepare!
Rent
As landlords come under fire from interest rate hikes and the border reopens, Australian rents are set to skyrocket in 2022. But even if you’re not renting your forever home, you can still plan for the long-term.
Build a budget. Try out our budget calculator to see where you could save.
Think long-term. Consider your long-term housing prospects by weighing up renting vs. buying.
Switch bank accounts. Boost your savings by comparing bank account options.
Home loans
The housing market has been volatile lately in the wake of variable and fixed rate hikes. However, this doesn’t mean your finances have to be equally chaotic.
Do your research. Compare home loans to get started.
Think long-term. Be sure to consider the long-term housing market outlook when making a decision.
Utilities
Keeping the lights on and water running is a given, but there are other bills like gas, internet, and even bin collections that can sneak up on you.
Track your spending with a budget. These budgeting apps will even do it for you!
Save energy and compare providers. Consider energy saving measures and whether you’re getting the best deal by comparing energy providers.
Be season conscious. Heat the human, not the home, and rethink your energy usage as we head into the heart of winter.
Savings accounts
Savings accounts can be an integral part of boosting your finances, so it’s important that it does as much heavy-lifting as possible.
Consider high-interest savings accounts. Returns on savings accounts have begun to climb, so it could be time to switch high interest savings accounts.
Save and budget. You can even challenge yourself to save in fun ways or design an impeccable budget so that you’re putting as much money away as possible.
Groceries
While food might be a necessary expense, there are ways to save without compromising quality.
Shop online. Our research team at Mozo has also taken the time to carefully study and compare the best online shopping options on the market, so you can save time and money.
Subscribe to a meal kit service. Our research has found meal kits make a compelling, budget-friendly alternative.
Heed shopping tips, like shopping later in the day, making a list, or cutting back on meat. You can catch more sneaky tricks like these in our new low-cost shopping guide.
Petrol
The price of petrol has seen an 8-year all-time spike. But even if you can’t control global oil prices, you can still plan clever ways to reduce costs.
Cut back on your work commute.
Work from home, or at least weigh up the pros and cons.
Reduce petrol. If the car trip is unavoidable, consider these five ways to save petrol. Even investing in an electric vehicle could save you long-term.
Take advantage of fuel rewards. While membership fuel rewards may not save you much, their value grows if you’re a frequent driver.
Erratic weather due to climate change
The past two years have slammed Australians with back-to-back droughts, bushfires, and intense flooding. It can be easy to feel helpless, but there are plenty of ways to reduce your carbon footprint while we address the larger systems at work.
Get sustainable. You can go green with your home or choose sustainable investment options.
Get covered. Meanwhile, protect your home and valuables from erratic weather events by considering either cheap home insurance or cheap car insurance.
