THE BIG PICTURE: Why Australia’s ranking as one of the world’s most expensive cities means next to nothing

The Economist Intelligence Unit has released a new report ranking the world’s most expensive cities. And there’s bad news for Australia.

The EIU has found that Sydney is the world’s seventh most expensive city. Other Australian cities also don’t fare well with Melbourne close behind in eighth spot followed by Perth (12), Brisbane (13) and Adelaide (17).

The data shows that it is now 50% more expensive to live in Sydney and Melbourne than in New York. And that sounds frightening until you dig beneath the surface.

The fact is that Australian cities have climbed the ranks of expensive places to live because the Aussie dollar has soared. And that makes sense because surveys of this type need to have a common base, and that base is the US dollar. So it should come as a surprise that Australian and European cities have supposedly become more expensive and US cities have become less expensive.

But in practical terms surveys of this type are next to useless. Unless of course you are a US citizen wanting to buy a house in Australia. And if you are a foreign tourist visiting Australia you also probably recognise that your currency doesn’t stretch as far as it did three, five or 10 years ago.

However if you are an Australian citizen, the cost of living hasn’t magically soared over the past few years. Some items make have become more expensive, but others have become less expensive. That’s why we have a consumer price index to measure these changes. And the latest figures show that the underlying rate of inflation is around 2.5% – exactly where the Reserve Bank wants it.

The other important point is that if you want to get an idea of how expensive it is to live in a city, you have to compare wages with prices. Because the most important concept is affordability. And the important point here in Australia is that affordability has continued to improve for a raft of items.

Data should show this week that the average adult wage (full-time workers, ordinary earnings) has risen by 8.8% over the past two years while inflation has grown by 5.8%. Over the past four years, wages have soared by 21.5% versus a 12% increase in prices.

If you did the same comparison overseas, you are unlikely to find the same positive results. In fact in Australia we should be less concerned about prices, but rather the fact that we may be getting paid too much!

The week ahead

The Australian financial diary in the coming week is dominated by data on wages and the Reserve Bank. Meanwhile the housing and job markets dominate the economic data schedule in the US.

In Australia, minutes of the February 7 Reserve Bank Board meeting will be released on Tuesday and on the same day the Reserve Bank Governor will be a panel discussant at the ASIC Summer School. Many investors want answers on the surprise decision to leave rates unchanged. Either of these two events could provide some illumination.

On Wednesday the main gauge of wage growth in the economy – the wage price index – is released. It is clear from business surveys and anecdotal evidence that employees and unions are finding it hard to extract wage increases from management in these cautious times. So we expect that annual growth of wages held steady at a benign reading of 3.6%.

On Thursday another indicator on wages is published – average weekly earnings. Compositional changes make this indicator less reliable in determining wage growth but it does provide useful dollar estimates of wages for industries. On the same day, the Reserve Bank Head of Financial Stability will deliver a speech on the role of prudent mortgage lending standards

Also on Friday the Reserve Bank Governor will be subjected to his semi-annual testimony to the House of Representatives Economics Committee. Clearly he will be questioned closely on the Board decision to leave interest rates unchanged and the ‘glass half full’ view of economic conditions.

In the US, the Presidents Day holiday kicks off proceedings on Monday with government offices and financial markets closed.

On Tuesday the regional Chicago Fed index is released while on Wednesday data on existing home sales is issued alongside weekly chain store sales data and the weekly mortgage market index. Economists tip a modest 2% lift in home sales to a 4.7 million annual rate – further evidence that the housing market has bottomed.

On Thursday, the weekly data on unemployment claims is issued together with the Federal Housing Finance Agency home price index for December. In November home prices lifted by a modest 1%, but encouragingly it was a gain, not a loss, a rare event over the past three years.

And on Friday the final estimate of the Reuters/University of Michigan consumer sentiment for February is released. The first reading was disappointingly soft at 72.5. Also on Friday data on new home sales is issued. Economists expect that sales rose in January with the consensus tipping an annual rate of 315,000 in the month, up from 307,000 in November.

Also of note the G20 finance ministers and central bank governors meet over Friday and Saturday in Mexico City. Investors are used to empty platitudes from these meetings, but given the gravity of world economic problems, more concrete action will be demanded.

Sharemarket, interest rates, currencies & commodities

The Australian profit-reporting season continues in the coming week before reaching its finale on the first day of March. On Monday, Amcor, Bendigo & Adelaide Bank, Bluescope Steel, Challenger, GPT Group and UGL Group are expected to issue results. On Tuesday, CFS Retail Property, Commonwealth Property Office Fund, Downer EDI, Flight Centre, Invocare, MacMahon Holdings, Mirvac and Oil Search are amongst those listed.

On Wednesday, Asciano, Coca-Cola Amatil, Computershare, CSL, Super Retail Group, Suncorp, Seven West Media and Woodside Petroleum are expected to issue earnings results.

On Thursday, APN News & Media, Austar, Breville Group, Cabcharge Australia, Envestra, Fairfax Media, Virgin Australia, Consolidated Media, Ramsay Health Care, Toll Holdings and Transpacific Industries and IAG are scheduled to issue their profit figures.

And on Friday, AGL Energy, Crown, Oil Search, Pacific Brands and Telecom New Zealand are listed.

It is still early days in 2012 but commodity prices have generally started the year positively – in line with equity markets. Despite ‘official’ bodies like the International Monetary Fund and World Bank reducing forecasts for global economic growth this year, private sector investors and analysts are more positive, believing a mild European recession will end in the first half of the year.

The Commodity Research Bureau’s commodity price index has lifted 2.7% so far this year although falling short of the solid 5.5% appreciation in the Aussie dollar against the greenback.

Base metals have posted healthy gains in 2012 led by zinc (up 12.7%) and followed by copper (10.7%), nickel (9.3%) and aluminium (up 8.8%). The other solid performer has been gold (up 10%). Thermal coal has lifted almost 5%, iron ore has gained almost 3% and oil is up 2%.

Agricultural commodities have been more mixed with sugar up almost 6% and cotton up 3% but wheat down 2% and rice down by 3%.

Craig James is chief economist at CommSec