Measuring affordability in time, not dollars paints a different inflation picture

Prices are still rising faster than the Reserve Bank would like. Overall inflation is stuck at 3.8 per cent, well above the RBA's 2.5 per cent target. Even the underlying measure, which strips out one-off jumps, is running at 3.4 per cent.

But the psychology of inflation is as powerful as the statistics.

If people start to believe higher inflation is the 'new normal', they may change their behaviour - building price expectations into wage demands and everyday decisions. That, in turn, can make inflation harder to bring down, as the RBA has worried.

But that psychological impact generally does not take the full picture on prices into account.

There is a deeper issue in the way we discuss these numbers. We focus almost exclusively on dollar prices. We see a higher sticker price and infer that life has become less affordable.

Economists call this cognitive shortcut money illusion - reacting to nominal prices without accounting for income changes.

But households do not consume dollars. They consume goods and services purchased with the fruits of their labour.

The relevant question is not simply whether prices are rising, but how many hours of work are required to purchase what we need and want.

If wages rise faster than prices, the burden of obtaining goods falls - even if the nominal price increases. If wages lag behind prices, the burden rises - even if inflation appears modest.

This is the logic behind 'time pricing'. Instead of measuring affordability in dollars, we measure it in hours.

Divide a price index by a wage index. If the ratio rises, the item requires more work time; if it falls, less. The result is intuitive and grounded in lived experience. Hours are harder to spin than dollars.

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The latest CPI tells us that inflation remains above target. It does not, by itself, tell us whether Australians are working more or fewer hours to maintain their standard of living. To answer that, we need to compare price rises with wage rises.

Over longer horizons, this comparison often produces a more optimistic picture than headlines suggest. My recent research applying the time-price method found that many goods have become more affordable relative to wages, even when their dollar prices rose.

Since the late 1990s, Australia's prices for communication, clothing and footwear, household furnishings, and recreation have risen modestly or even fallen in some cases.

When expressed relative to wage growth, the 'time price' of many of these goods has declined significantly. Communication, for example, has become dramatically more affordable. Clothing and household goods require fewer hours of work than they once did.

That reflects the power of competition, innovation and productivity growth. Where markets are open and firms must compete, abundance and affordability expand.

However, the time-price approach also clarifies where the real price pressures lie. Housing, education and health have become less affordable relative to wages.

In those sectors, prices have risen faster than incomes over long stretches. That is not a generalised failure of capitalism. It is a sector-specific problem tied to institutional design.

Housing is the clearest case. When land-use regulation constrains supply in high-demand areas, the system prevents new construction from responding quickly. The result is a higher 'time price' for homes.

Education and health display similar dynamics, though through different channels. Heavy subsidies, third-party payment systems, and regulatory barriers can insulate providers from competitive pressure and weaken price discipline.

The point is not to deny that recent inflation has squeezed households. Short-term price spikes can strain budgets, especially for those on fixed incomes.

Nor is it to suggest that monetary policy does not matter. The RBA is correct to take inflation expectations seriously - which is why it has flagged another possible rate increase.

The point is that the CPI, by itself, does not settle the affordability debate.

Inflation is an average of many moving parts. It obscures the difference between sectors where abundance is expanding and sectors where scarcity persists. And it encourages a focus on nominal prices rather than real burdens.

If Australians come to believe that 'everything is getting more expensive', they may support sweeping interventions, such as price controls, aimed at restraining prices across the board.

But the time-price lens suggests a more targeted approach. In competitive, tradable sectors, markets have delivered remarkable gains. In policy-constrained sectors, reform should focus on removing chokepoints to supply and competition.

If shoppers see higher grocery bills, they feel poorer. But if their wages have risen enough that the grocery basket requires the same or fewer hours of work, the real story is different from the nominal one.

Conversely, if rents consume a growing share of work time, the problem lies not in abstract 'greed' but in concrete barriers to building.

Public debate about the 'cost-of-living crisis' often begins with a flawed premise: that rising nominal prices automatically mean declining living standards.

The more precise question is whether the hours required to obtain goods and services are rising or falling.

Inflation vigilance is warranted. But it should also prompt a more sophisticated conversation. Instead of asking only, 'how much did prices rise?', we should ask, 'how many hours do Australians have to work to pay for what they need?'

When those hours fall, affordability grows, even if headlines are gloomy. When those hours rise, we should look carefully at the institutional barriers preventing markets from delivering the same productivity gains that have transformed communications, clothing and consumer electronics.

If we want a clearer view of Australia's economic trajectory, we should start measuring the cost of living not just in prices, but in time.

In the end, dollars can mislead. Hours rarely do.