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).
That seems to me like a fairly easy concept to understand. Apparently it’s not. I know it’s not because of the way that today’s Economist Intelligence Unit report on the Worldwide Cost of Living was reported.
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.
[For the purposes of the this report,] local inflation in mature markets always has far less influence on the relative cost of living than the currency movements of the countries in question. This also explains the recent presence of Australian cities like Sydney and Melbourne in the ten most expensive locations as last year saw the Australian dollar pass parity with the US dollar from holding half that value a decade ago.
Despite the report’s clarity about its purpose and methodology, Australian media outlets have reported that it finds that the cost of living for Australians has risen. It shows no such thing.
For example, The Australian reported:
The cost of living in Sydney, Australia, is close to 50 per cent higher than in New York, according to a new survey that illustrates the painful side effects for residents living through a once-in-a-century mining boom.
The findings will ring true with many locals, who regularly complain of rising prices for everything from energy supplies to staples such as fruit and vegetables.
Of course, the report doesn’t say anything about the ‘painful side effects’ of the mining boom for Australian residents, because it isn’t designed to do so. This type of write-up was typical of many others that emerged this afternoon in various media outlets.
What strikes me as particularly strange is that all the media reports noted that the exchange rate was the main cause of the rising cost of living as measured by the EIU. They nevertheless focused on the apparent change in the cost of living for Australians. This doesn’t make much sense.
Either the journalists understood what the report was designed to do and they or their editors chose to put a slant on the story that misrepresented the facts, or the journalists were genuinely unaware of what the report sought to measure and its methodology in doing so. It’s disturbing either way.