The cost of living: when will we reach the tipping point?

Even though interest rates may have fallen, and there are indications there will be further rate reductions to stimulate economic activity, it has never been more expensive to live in Australia. We now have two cities ranked in the top ten most expensive places to live in the world. As the BBC put it in a recent article, in Australia "the good life comes at a price".

You can see the evidence of it just about everywhere you look. According to Numbeo, a website that tracks the cost of living in cities around the world, a combo meal at McDonald's ranges from $7.95 to $9.00 in Sydney, the most expensive city in Australia. Rent per month for a one bedroom apartment in Sydney city centre works out at roughly $2,249. The picture isn't as bad in Melbourne, the country's second most expensive city, where a single loaf of bread ranges from $2.00 to $4.00 and an imported bottle of beer will set you back anything from $5.00 to $8.00. It's cheaper than Sydney, but it's isn't pretty either.

Everyone in the country knows the cause: the unprecedented resource boom, itself a perfect storm of record demand and inflated prices. For years, we shipped ore to emerging economies like there was no tomorrow. The resource boom may have swollen the government's coffers, but it looks like those glory days are over.

2012 was a pivotal year in Australia's recent economic story. The resource boom was declared over in August 2012, the culmination of the world's economy lurching from one economic crisis to another. Demand for the raw materials needed to manufacture the goods we buy in the West pulled back and the rate of economic activity in those critically important BRIC countries began tapering off. In October the RBA cut rates again to try and stimulate lack lustre demand for credit among increasingly wary Australian consumers. The year ended amid more speculation that the bubble had perhaps not burst, but certainly was deflating.

Andy Boyd, Co-Founder of the credit card comparison website CreditCardCompare.com.au, spoke in detail in a recent article on YourMortgage.com.au about how the cost of living has risen steadily throughout the boom years. His innovative heatmap plots the stark increase clearly over time before and during the boom. After looking at the charts his tool produces, one question begs an answer: how long can this go on for? Are we approaching a tipping point?

The reality of our situation is beginning to dawn and households are struggling with the hangover from an unprecedented financial party. The heydays have come and gone, yet the cost of living remains stubbornly high. If demand for our natural resources doesn't pick up or goes into decline, then what will happen? It's this sense of uncertainty in the economic future of our country that the RBA is attacking with rate drops, but to what end? If the cost of living in this country is inextricably linked to the mining sector's success, do we really want to see part two of the boom and the associated rises in living expenses it would bring?

We have increasingly been hearing reports of families who are struggling to make ends meet because not everyone has benefitted from the past 10 years. Families are struggling with debt. They're eeking out an existence on the margin. They can't afford to buy a home.

A tipping point won't be welcomed by the mining industry and government would be faced with a serious reduction in tax receipts, but the average consumer might look on it differently. Very differently.

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