Most Australian news outlets ran stories yesterday and today claiming a new study shows that costs of living in our capital cities are amongst the highest in the world. Lamentably, virtually all of them fundamentally misinterpreted the research.
Picture by Brendon Thorne/Getty Images
This week, the Economist Intelligence Unit (EIU) released its annual Worldwide Cost of Living study. That study aims to compare the cost of living in various cities, but (and this is the important bit) it does so from the perspective of global companies who have to compensate their executives for the cost of living if it asks them to work overseas. It’s a tool for HR executives who have to send someone from Stockholm to Sydney, but you wouldn’t know that from the way most local outlets reported it.
A quick search reveals stories in the Australian, Sydney Morning Herald, Herald Sun and numerous others covering the report. Every single one leads with the notion that the EIU confirms that “Australian cities rank among the world’s 20 most expensive places to live”, as AAP put it. That might be true for people being paid in US dollars, but the study says nothing about Australians employed in Australia and paid Australian dollars, which is most of us.
Blogger Matt Cowgill debunks that entire line of argument very thoroughly in a post on his We Are All Dead blog, and the whole thing is worth reading. The simple point is that a study designed to assess the cost of living for someone not residing in their home country, and calculated using the same currency (the US dollar) as a base, will not tell us anything about costs for most Australians. As Cowgill explains:
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.
The report itself emphasises how it is global currency movements, not expenses in those countries, that has placed Australian cities in this particular list:
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.
The strong dollar will have an effect on prices for us, but this study does not measure that impact in any direct way that relates to Australian wage earners. Using it for a news story as evidence that life is more expensive for Australians says something about the organisation reporting it, but virtually nothing about actual costs. As we like to point out around here, statistics are meaningless if you don’t understand what they are measuring.