Cost of Living 2022: Everything you need to know about handling rising living costs
- 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.
Introduction to 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:
- The cost of basic necessities.
- Whether people can afford those costs.
- How changes in those costs affects 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.
Table of Contents
- How much does it cost to live in Australia?
- Cost of living vs. standard of living
- How do we measure the cost of living? The consumer price index explained
- Are we paying more for everyday items? Why the consumer price index matters
- How do price changes affect you?
- What are our biggest expenses in 2022?
- How can you save money in 2022?
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:
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).
Meanwhile, collaborative database Expatistan estimates the cost of living for a single person in Sydney is actually an eye-watering $4,111 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
- 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 managing expenses and saving money, 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. Therefore, it’s important to compare wage growth (WPIs) 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.
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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 March 2021-2022, headline inflation in Australia appears to have risen by a distressing 5.1%, with the cost of non-discretionary items (which low-income Australians spend most of their incomes buying) spiking by a startling 3% in the March 2022 quarter alone.
Meanwhile, wages appear to have only risen by 2.4% in that same time period. This means that the price of goods grew 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.
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:
- Home insurance premiums.
All of these expenses can change based on the fluctuating economy.
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:
- 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.
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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. A study from NAB found that debt repayments, bills, and everyday spending has left one in three Australians with high financial stress.
Here are a few critical expenses eating into people’s budgets in 2022, and how you can manage them.
Experts predict that Australian rents will sharply increase in 2022 after the border reopens. But even if you’re not renting your forever home, you can still plan for the long-term.
- Build a budget. You can try out our budget calculator to see where you can save, or take advantage of one of these amazing smart money apps to do the legwork for you.
- Think long-term. Consider your long-term housing prospects by weighing up renting vs. buying.
- Switch bank accounts. You can also find ways to boost your savings by comparing bank account options.
- Think long-term. While variable interest rate home loans may be cheaper at the moment, they may soon take over as the most expensive home loan option on the market. Be sure to consider the long-term housing market outlook when making a decision. While you're at it, consider brushing up on your understanding of monetary policy: this can help you read the property market and prepare!
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 spending with a budget. We’ve made a budget calculator so you can see where you can save.
- Save energy and compare providers. Be sure to also consider energy saving measures and whether you’re getting the best deal by comparing energy providers.
- Be season conscious. Rethink your energy as we head into autumn.
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. Because the RBA has anchored the cash rate at 0.1% since November 2020, returns on savings accounts aren’t terribly lucrative at the moment. However, there have been small bumps to interest rates in recent months, so if you’re hoping to save, 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.
While food might be a necessary expense, there are ways to save without compromising quality.
- Shop online. Studies show that online grocery shopping could save you big time.
- Subscribe to a meal kit service. Our research has found meal kits make a compelling, budget-friendly alternative.
- Compare grocery stores. 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.
- 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.
The price of petrol has seen an 8-year all-time spike. To offset the inflation, the Australian government has gouged fuel excise taxes in the hopes that retailers will pass on the savings to customers.
But even if you can’t control global oil prices, you can still plan clever ways to reduce costs. Since cars seem to be getting more expensive overall, it’ll become increasingly important to consider all your transport options.
- Cut back on your work commute.
- Work from home, or at least weigh up the pros and cons of working from home.
- Reduce petrol. If the car trip is unavoidable, consider these five ways to save petrol. In fact, 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, they could still save you long-term, especially 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 covered. Meanwhile, protect your home and valuables from erratic weather events by comparing home insurance coverage.
How can you save money in 2022?
While you’re not in control of changing global market dynamics, there are plenty of ways to save money and manage the rising cost of living.
Here's a list of tools and guides to get you started.