Real pay is not declining: former treasury economist

“The wage price index underestimates wages.”

“You have to add up the pension guarantee increase and bonuses.”

According to Mr Downes’s figures, the quality-adjusted wage index rose 3.3 percent in the year to the March quarter and “will continue to rise, but probably not to an alarming extent”.

The broader wage measure is marginally above consumer price inflation at 3.2 percent through March 31 in the national accounts, as measured by the so-called consumer deflator.

Since 2019, adjusted real wages have increased by about 2.5 percent on average, he said.

Unions demand significant wage increases to keep up with the 5.1 percent inflation rate, which the Reserve Bank now predicts will reach 7 percent.

The Labor government has admitted that general wage growth cannot be sustained at this level after RBA Governor Philip Lowe warned it would risk a wage-price spiral.

In addition, the cost of a new home accounts for almost 10 percent of the weighting of the consumer price index.

Prices of residential building materials, such as steel and wood, have soared, raising the overall CPI by about 1 percentage point.

Mr Downes, the director of consultancy Outlook Economics, said this was for housing investment by a minority of homeowners and not consumption, so it should not be used to measure the price of goods and services.

“That’s not consumption, that’s investing.”

“And two-thirds of the value of your house is land.”

“I worry that everyone is reporting the CPI and it’s actually not our best measure because it overestimates inflation.”

In addition, when prices for some goods rise, consumers often replace them with similarly cheaper items, such as switching from expensive strawberries to cheaper apples or bananas.

The goods basket measured in the CPI doesn’t immediately capture this change in consumer behavior, so it overestimates how much people spend on items.

This bias adds an estimated 0.25 percentage point to annual inflation.

The Australian Bureau of Statistics notes: “The CPI measures the change in the cost of purchasing a fixed package of goods and services over time and as such only includes pure change in price.”

In contrast, the quarterly consumer price deflator of the national accounts reflects the real consumption pattern of people every quarter.

For example, it would give less weight to expensive strawberries and more weight to cheaper apples or bananas based on people’s adjusted spending.

National Australia Bank economist Taylor Nugent said: “The CPI measures price changes as if consumers had bought the same basket of goods from period to period.

“The implicit price deflator means that consumers buy fewer things that go up in price and more things that go down in price.”

Even the more moderate national accounts consumption deflator overstates inflation because it does not take into account quality improvements, such as for goods and services such as the advance of health care and new products.

NAB’s Mr Nugent said a key difference between measured inflation in Australia and the United States was that the US included imputed rents that homeowners would receive if they rented out their primary residence to themselves.

“In Australia, buying a new build home is usually considered an investment in economic statistics, but it’s in the CPI here.”

“That’s why construction costs are so important to inflation in Australia.”

Excluded from Mr Downes’s real wage analysis was additional money that low-to-middle-income earners will receive through tax offsets from July after filing their tax returns.

Employees who earn between $48,000 and $90,000 will receive the full $1,500 in compensation, while an employee with $37,500 will receive $1375.

The tax offsets decrease for people earning up to $126,000.

“This should take some of the sting out of higher petrol prices and other temporary price increases, at least in the short term,” said Mr Downes.

“And there were other giveaways in the budget, like higher childcare subsidies.”

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