This paper argues that public debate about the cost of living is based on a misunderstanding of how living standards should be measured. The paper outlines that Australians are, in many areas, more materially better off than headline price figures suggest.

Drawing on long-run data from both the United States and Australia, the paper contrasts movements in consumer prices with movements in wages. The paper identifies housing, education and health as sectors where affordability has deteriorated in wage-adjusted terms.

The paper argues that these outcomes are not arbitrary. Sectors in which affordability has increased tend to be tradable, scalable and exposed to competition. Sectors in which affordability has declined tend to be characterised by supply constraints, government regulatory barriers, third-party payment systems and heavy subsidies that weaken price discipline.

The paper finds the cost-of-living problem is not a general failure of markets but a sector-specific failure of policy design. Where markets are allowed to operate with competition and innovation, abundance rises. Where supply is restricted or pricing insulated from consumers, scarcity persists. 

Key recommendations

• Reform land-use regulation to allow housing supply to respond to demand. Increase price transparency and competition in healthcare.
• Re-examine higher education finance in light of supply constraints and pricing power.
• Scrutinise childcare regulations and subsidies to ensure they expand supply rather than merely inflate demand.