If there is one topic that gets me the most criticism, it is the cost of living. Since writing for Guardian Australia, whenever I write on the topic I am bound to get smashed in the comments section. Partly this is my own fault, partly due to people’s innate beliefs about the cost of living, and partly due to the way the cost of living and inflation is measured, which can understate the importance of essential items in the overall inflation figure.

When I examined the latest cost of living figures last week, surprisingly the growth for aged pensioner households was lower than that for employee households – and the rate for both was below that official inflation growth figures:

It meant that if you used employee cost of living as the inflation measure, real wages growth was actually pretty good – as good as it had been during the mining boom:

As I found this surprising, I wrote my piece, suggesting while those with a job and a mortgage might not be able to say they have never had it so good, things weren’t as bad as they might seem.

And I got smashed in the comments.

Fair enough too, because there’s always a lot of caveats with such grandiose statements. It was very specific to one group, and required, for example, those employees who have jobs to have not had a reduction in hours. Sure, their hourly pay rate might have increased, but if the hours worked had decreased than real wage calculations don’t help much.

Despite low wage growth we've never had it so good. It's a wacky state of affairs | Greg Jericho Read more

But with cost of living there are always a lot of misconceptions, and it is perhaps the only time I have some small sympathy with politicians who can never suggest cost of living pressures are weak for fear of being smashed by their opponents, the media and voters.

Part of the problem is what I call the “nominal rate fallacy”. If wages are growing by 4% a year and your cost of living is growing by 3%, for some reason that can feel better than if your wages are growing by 2% and costs are only going up by 1% even though in both cases real wages are growing by 1%.

It’s also an issue of how important is real wage growth – and does it measure anything of any great worth? Yes we should hope that our wages rise faster than inflation – were it not to happen our standard of living would be falling.

But does strong real wages growth tell us much?

If we look across the different states, the state with the strongest real wages growth is South Australia:

And yet that state has the highest unemployment rate in the nation – so strong wage growth doesn’t always suggest strong employment.

Another issue is that cost of living and inflation are just averages. As a result the ABS estimates how much households spend on various items, and because it is an average they come up with an average household that represents no one.

For example in the CPI basket of goods, the ABS estimates on average 6.71% of a households weekly budget is spent on rent and 8.67% is spent on the purchase of a new dwelling, and to top it all off 3.25% is spent buying a new car.

Now obviously no household spends like that, but on average all households across Australia do, even if no single household does. And while you might think it renders the measurement useless it at least gives us a guide because we cannot measure the inflation for every single household in Australia.

The problem however is that there are some aspects which can really skew the measurement for specific households.

The ABS, for example, estimates that households spend 7% of the weekly budget on alcohol and tobacco. Because tobacco prices rise massively due to excise increases this means if you exclude alcohol and tobacco from the CPI instead of a 1% rise in inflation it is just 0.6%.

But what about if you are a smoker? The average of 7% covers smokers and non-smokers, meaning that smokers would necessarily spend more than that amount on cigarettes.

And while inflation in the past 10 years has risen 26%, the price of alcohol and cigarettes has risen 67%:

So if you are a smoker, hearing talk of low inflation wouldn’t really pass muster.

Another problem is that people can assume some things are rising by more than they really are because in the past they were rising faster than they are now. Rents are a very good example of this.

In the past 10 years in Sydney for example rental prices were rising by as much as 8%, by up to 10% in Brisbane and nearly 14% in Perth. But in all cities now rental price growth is very low:

But while that is great now, it also means that the low rise in cost of living might not make up for large increases in previous years – especially for more essential items.

And that is another problem with the inflation measure – it assumes a set amount is spent each week, and doesn’t assume that if the price of something such as gas or electricity rise that you don’t then stop spending money on something else – even if that something else has gone down in price.

Over the past 15 years, the price of utilities, property rates, insurance and medical costs has far outstripped wages growth:

On the other hand, the price of items such as domestic holiday travel and accommodation, AV and computing equipment, communication equipment and services has risen well below that of wages:

The whole basket of goods does then suggest cost of living pressures are weak – and real wages are growing.

But when broken down, and considered by how prices of various items – especially essential items – have in the past outstripped wages growth and how perhaps price falls are occurring more among the more luxury items, it’s not surprising that many would suggest cost of living pressures remain, regardless of what the overall figures suggest.