Financial growth can cause us a lot of problems.
The Consumer Price Index also known as the CPI is used as a measure of growth in our economy. It is tracking at 3.3%. It is a general measure of inflation. The Reserve Bank uses it to help them decide whether to raise interest rates to bring it back down.
The CPI reflects a basket of goods and services purchased by household but these include both essential and non-essential items. Food petrol electricity health care pharmaceuticals and rent are generally regarded as essentials while furniture cars plasma televisions clothes laptops and music from iTunes are non-essentials or deferrable. Mortgage interest charges are excluded from the CPI.
The CPI might be 3.3% but the essential items are tracking at 8% increases while non-essentials are declining because our high Australian dollar enables them to be imported cheaply. The CPI is an average of all these items so it is giving a very unfair picture. Essential items are a much bigger share of less affluent household budgets.
The CPI excludes the increase in house prices as a result of the increase in land prices and most if not all of the increase in house prices is due to an increase in land prices.
It excludes shares.
The CPI understates inflation and basing interest rate policy on it means that that interest rates are artificially low and house prices soar which makes it very hard for younger non-homeowners to get a home.
Asset price inflation is ignored in the policy settings.
Many workers have their salaries set by indirect reference to the CPI rate of inflation or are castigated if they ask for wage increases above this reported rate of inflation. So workers’ salaries are set by an understated cost-of-living measure.
At the same time chief executives compensation is justified by reference to the sharemarket performance which has asset price inflation unmeasured in the CPI.