Has Australia's cost of living really increased

Nope. Matt Cowgill discusses in The cost of living – if the facts aren’t sensational enough, just add a twist that the recent Economist Intelligence Unit report on the Worldwide Cost of Living is looking at it from the perspective of an expat earning US dollars.

Imagine if Australian prices and wages both went up by five per cent in a year. The cost of living for Australians would be unchanged.

Now imagine that the Australian dollar appreciated by 10 per cent in the same year. Although Australian goods and services would be no more expensive for Australians, they would suddenly cost more for Americans and Brits who earned US dollars and pounds. Australia would have become a more expensive place for Americans to live, if they’re being paid in US dollars, but the cost of living for Australians would have stayed the same (setting aside the fact that imports actually would’ve become cheaper for Australians).

He goes on to note:

The EIU report is intended to help “calculate cost-of-living allowances and build compensation packages for expatriates and business travellers”. It calculates the cost of living in various cities in a common currency, US dollars. This means that in my hypothetical example of a few paragraphs ago, the report would show the cost of living in Australia going up, because the AUD had appreciated. It would take more US dollars to achieve the same standard of living in Australia as it did before the appreciation.

Although the study is perfectly well designed for its intended purpose, it tells us very little about the cost of living for people who live and work in Australia and are paid in Australian dollars. The EIU is quite clear about this – the first subheading of the report is “Currency Swings Move Global Players”. It clearly states that its measure of the relative cost of living in various cities is more affected by changes in exchange rates than changes in domestic prices.

However, that's not how our media reported it. Let's make up two headlines:

• Cost of living in Australia goes up for Americans, stays the same for Australians
• Cost of living in Australia up - Sydney more expensive than New York

I imagine the latter will get the click throughs.