Is the cost of living crisis over?

It is relatively easy to identify the beginning of the cost of living crisis. The starting gun was fired with the rise of inflation and the resulting cash rate hikes in early 2022.

While some Australians were already struggling before this point, the idea that the nation was in a cost of living crisis gained real traction from early 2022, as Google Trends data reflects.

Much has shifted in the three years since. Price rises have fallen back to 2019 levels, which has allowed the RBA to deliver three 3 rate cuts over the last 5 meetings. These cuts save the average mortgage holder an estimated $3,806 annually.

So, is the crisis over?

Defining a cost of living crisis

To answer this question, I thought it would be prudent to define what a cost of living crisis is:

"A cost of living crisis occurs when the price of essential goods and services (like groceries and rents) rises faster than average earnings, leading to a decline in living standards."

It's clear from this definition that to identify if the cost of living is over, we need to consider two key questions:

1. Are wages rising in line with or faster than prices?
2. If so, have Australians' living standards improved as a result?

Wages vs prices

The Australian Bureau of Statistics (ABS) publishes quarterly data on both wages and consumer prices. At first glance, wages have been growing faster than inflation since 2024.

Great, we've made it out of the woods! It's not quite as simple as that though.

The consumer price index (CPI), which we are using as our measure of prices in the above graph, includes a wide range of items but we only want to focus on essential goods and services. The CPI also doesn't include one of the most essential expenses that over a third of Australians pay each month: mortgage repayments.

When we isolate essential costs and include housing repayments, a more complex picture emerges.

Grocery prices have begun rising more slowly than wages, and electricity costs (which aren't graphed here for neatness) have actually fallen due to government subsidies.

However, rents and mortgage repayments continue to outgrow wages. Data from Cotality (formerly CoreLogic) also reveals that house prices have kept pace with wages, meaning affordability hasn't improved in real terms either.

For the millions of Australians who rent or are still paying off a home, the pressure hasn't eased in many areas.

Are living standards improving?

We could look at real discretionary incomes as a measure of living standards, but subjective data can also be revealing.

Our nationally representative Consumer Sentiment Tracker provides insight into how Australians feel about their financial well-being. While subjective surveys have their flaws, we carefully design questions, screen respondents and clean the data to ensure it's robust.

The first interesting trend that emerges is the different proportion of renters and mortgage holders who are struggling to pay their respective housing costs.

Housing stress has historically been higher for renters. While mortgage stress levels have decreased from a peak of 41% in October 2024 to 31% currently, rental stress has remained high, especially over the last 6 months.

Mortgage holders feel the benefit of rate cuts immediately via lower repayments. But landlords, of course, don't pass those savings on to tenants. As a result, renters aren't seeing any real relief from falling interest rates.

This contrast is clear when we compare the average amount each group saves per month.

The average mortgage holder saved an additional $258 in August when compared to just three months earlier in May.

Are we there yet?

Many of the traditional indicators we use to measure the cost of living are improving, but there is nuance hidden behind the average figures. Two-thirds of Australian households rent the roof over their heads, and almost half of them (45%) say they struggle to do so. The recent cuts to the cash rate are having a noticeable impact on mortgage holders but are yet to be felt by renters who are still saving roughly $400 on average.

The difference between renters and homeowners is just one example of the nuance in our economy. While we may not all be clear yet, it does look like greener pastures are close. The RBA has managed to bring inflation down within their target range of 2-3% without causing a significant jump unemployment. It may take some more time to be fully felt, and certain groups will notice a bigger shift, but it seems we are slowly turning a corner.

Finder's Insights Column examines issues affecting the Australian consumer. It appears weekly on finder.com.au.