First the reality: This is now the richest country in the world. According to Credit Suisse Research Institute's most recent Global Wealth Report, the median wealth of Australians now is well over $200,000, just ahead of Switzerland and about four times that of the United States. Other statistics show we are building ourselves the largest new houses in the world, now about 10 per cent bigger than America's, twice the European average and almost three times bigger than Britain's. Our government debt is low, so is our unemployment rate, and our wages are high and growing, steadily and in a controlled way. We not only drip with material things, we are among the healthiest, longest-lived, least corrupt and best educated people in the world.

In comparison with almost anywhere else — and all the more obviously as most other developed countries have hit economic hard times — Australians lead blessed lives. The United Nations Human Development Index, which factors in life expectancy, educational attainment and economic measures, placed us second in the world in 2011, after Norway. If only the index factored in weather and sporting achievement, we'd be on top of the heap.

Now the mythology, spruiked on the talkback shows, harped on in the political realm and passed around as accepted wisdom in anecdotes shared over lattes and designer beers around the country: the cost of living is killing us.

And I have to say, having just arrived back in my homeland, after almost six years in the United States, that the chorus of complaint over living costs was one of my most powerful first impressions, right up there with the helpfulness of officialdom and the general affluence of the place.

It was not that I had not heard it before. Complaint about the cost of living is perennial, and not only in Australia. There have been times, too, when that complaint was quite justified, for instance during the period of so-called stagflation - the combination of high inflation and unemployment - which afflicted Australia between about 1973 and 1983. And such complaint is understandable today in the United States, where real incomes have been largely static for most people for a couple of decades, and in much of Europe, where living standards are falling as governments force "austerity" on their people.

Nor was it surprising that the complaint was politicised. Politicians of all stripes are apt to beat the cost of living drum, when they are in Opposition. The current federal Opposition and its leader, Tony Abbott, are no different, except in degree. They have been relentless.

So have many of the conservative talk show hosts, not to mention other media outlets, particularly the Murdoch press, though reasonable people might differ over whether the motivation is politics or marketing.

The surprising thing was that even the party being blamed, the Labor Government, appeared to be offering no defence.

Consider these comments, made by then-Prime Minister Kevin Rudd, in June 2010, in the wake of the global financial crisis. Rudd argued the Australian economy had held up well - which indeed it had - but allowed that "the cost of living pressures out there and the challenges faced by small business on the ground are real and they are hard.''

Instead of calling the myth for what it was and still is, Rudd suggested the government was moving to ameliorate the pain through further tax cuts. People on $50,000 would be paying 20 per cent less on July 1 that year than they were three years previously, he said.

Take new PM Julia Gillard's response on ABC TV in May 2011, when she addressed complaints about a Budget measure which slightly - and eminently defensibly - wound back future family benefits to households on more than $150,000 a year:

"Well, what I would say is, I understand families on $150,000 a year still feel cost-of-living pressures," she began.

The Labor leadership may change, but its deference to the myth has not. It continues to acknowledge the cost-of-living pain imagined by middle Australia as though it were real.

"When we say we feel their pain," said one frustrated MP, "we only encourage the complaints."

And so Australia generally continues to manifest a kind of contagious economic hypochondria.

Now, a confession: I also briefly suffered from it, immediately after my return to these shores. A hundred dollars for cab fare from the airport? They must be kidding. And why did a bottle of New Zealand wine cost 40 per cent more here than in Massachusetts, half-way round the world. As for restaurant meals….

But then I began to think about it. Things cost more here because we earn more here. The minimum wage in Australia is twice the average minimum in America. The wait staff at the restaurant doesn't work for tips, so you don't have to add 20 per cent to the bill. Petrol costs more here than in America (but still well below the average price in other developed countries) because of the excise on it, so cab fare costs more. But the upkeep paid for by those extra taxes means, for one, the bridges you drive over are not in danger of falling down. Likewise alcohol costs more here because of the tax on it, but good quality food is affordable not only to the well off, but also to the broad middle class.

Then I went shopping for the necessaries to set up house, and noticed something else that questioned the notion of Australia's high cost of living. All those consumer durables, as the boffins call them, were cheap as chips. What about a DVD player for $30? A flat screen TV for a few hundred? The Panasonic microwave for $125?

It became clear this whole cost-of-living issue merited closer analysis. Fortunately, someone with the relevant credentials had just finished doing it. Ian McAuley, a Harvard-trained lecturer in Public Sector Finance at the University of Canberra, had just finished an analysis of cost-of-living pressures, for the Centre for Policy Development. His conclusion is evident in the paper's title: "What Are We Complaining About?"

The work's genesis, McAuley says, was an approach from a journalist "asking me if it was worth doing a story on the high cost of living.

"I said 'No, the beat-up is the story.'"

The reporter, who shall remain nameless, did not want to do a story on why the cost of living was not a problem, but McAuley took it upon himself to prove his point.

"I felt so outraged about the beat-up that I went and did that paper. My interest is just that of an old fart interested in good public policy and seeing political and other debates head in the right direction," he says.

He started with three possible explanations for the common perception that middle Australia is doing it tough because of escalating costs of living.

The first possibility was that the popular wisdom was right, and that maybe incomes had not risen in line with costs, either as a whole or for some groups, because the Consumer Price Index - the official measure of inflation - was reading lower than it should, because the decreasing costs of some discretionary items, such as electronics, appliances and travel, masked strong rises in non-discretionary things, such as food and electricity.

The second possible explanation was that people's notion of what constitutes a reasonable standard of living had changed; in other words, that it was our expectations, rather than prices, that were rising faster than incomes.

The third, he says, was that "some prominent items of expenditure, such as electricity, have captured attention disproportionate to their actual effect on the overall cost of living."

And when he ran the numbers, the first explanation fell over, at least as it applies to the vast majority of Australians. (There are some notable exceptions, which we will get to later.)

McAuley compared real average earnings - that is, earnings adjusted for inflation - with the best broad measure of the cost of living, the Consumer Price Index, for the past six years. Over that period, which includes the global financial crisis, earnings were up an average 4.3 per cent per year, while the CPI averaged three per cent.

Cartoon by Jack Chadwick

Furthermore, disposable income - that which is left to us after tax - has risen even faster, because income taxes as a proportion of income have fallen.

He went through various other statistical measures - including weekly household income, both in gross terms and in terms of "equivalized disposable income" (which takes into account household size, which is declining), nominal and real housing interests rates (the latter takes account of general inflation) - and still Australians' incomes were rising ahead of inflation.

Next, he looked at the possibility that falls in the cost of some things, many of them discretionary expenditures, had masked rises in the necessities of life.

Certainly a breakdown of the CPI by category shows that some things - food, housing, health and education costs - have been rising faster than general inflation, while others - clothing and footwear, household contents and services, communications and recreation - have been rising more slowly.

So McAuley took out of the calculation those items whose prices had been rising more slowly or falling.

"When we construct such a pared-down index it reveals a 27 per cent rise over the last six years, compared with a 20 per cent rise in the more inclusive CPI," he wrote in his study.

Even allowing for this, though, the average employed person would have been ahead of the game, although by only about 0.8 per cent per year.

"In all, there is no hard evidence from the ABS data - and there has been a good deal of it presented - that points to widespread cost-of-living pressure," he wrote.

He did not deny that some groups were feeling the pinch - yes, we'll get to them - but suggested that those groups were "not the ones complaining on talkback media" and being stirred into resentment in politics and the media. (He speaks from the experience of having fielded calls on talkback media.)

He suggested that perhaps "new norms of expenditure have developed."

Another economic commentator, one Possum Comitatus (real name Scott Steel), writing recently for Crikey, put it more pithily.

"Far too many of us," he wrote, "managed to confuse Cost of Lifestyle with Cost of Living.

His was an extraordinarily rosy view of the Australian reality and an extraordinarily swingeing attack on the myth. He relied for much of his argument on a recent comparison by the Organisation for Economic Co-operation and Development (OECD) of income growth and distribution in developed countries since the mid 1980s. And the data was impressive; over that time, Australia did indeed leave "just about everyone else for dead," as he put it. Not only was Australia's overall income growth greater than any other country except Ireland (and Ireland's economic fortunes, as we all know, have lately been reversed), but our government debt and tax as a share of Gross Domestic Product (GDP being the measure of all goods and services produced in an economy) were among the lowest of all nations. In other words, we have achieved this success without taxing the heck out of the citizenry, or excessive borrowing.

Not only did the incomes of Australia's richest 10 per cent of households grow faster than any other in the OECD, he noted, so did those of the poorest 10 per cent of households, once you accounted for the recent reversals in Europe.

"The income of our poor grew faster than the income of everyone else's rich. Just chew on that reality for a bit," he wrote.

He lauded "Australian exceptionalism" grounded in the most successful economic system of the late 20th and early 21st century: a low-tax country with high quality public institutions, a low-debt country leading the world in human development and infrastructure.

The international comparisons bear him out. The most recent OECD numbers, for 2009, show Australia's total tax take was 25.9 per cent of GDP, compared with an average for the 34 member nations of 33.8 per cent. Our government debt was just 11 per cent of GDP, way below any of the major developed economies.

"But," Possum lamented, "so many of us simply deny it…"

Conservatives denied it, he said, "to whip up hysteria about their political enemies." And the broad left also denied it because to admit the reality was to acknowledge "we've actually solved most of the big problems … and they had little to do with it."

Certainly there was much that was true in Possum's polemic; you would be hard pressed to find any credible economic analysis which did not conclude that Australia's current economic position was the envy of most of the world. And it's a bit rich to suggest - as the federal Opposition does when it enumerates the things that have increased since Labor won office - that the high price of fruit is evidence of bad governance rather than simply bad weather.

Equally, there was much that was true that was not in Possum's piece.

And for some of that we'll go back to Ian McAuley's work.

The big cost rise he identified was housing. He compared the two most recent Housing Expenditure Surveys from the Australian Bureau of Statistics, done for 2003-04 and 2009-10. They showed weekly mortgage payments had jumped 37 per cent in real terms over six years. Over the same period consumer prices, as measured by the CPI, had risen only half as much - 18.7 per cent.

The cause did not appear to be interest rates; they were almost identical at the time of both surveys. He attributes much of it to the "quite frightening undersupply" of housing. The reasons for this are many, including a shortage of suitable land, convoluted approvals processes, constraints on builders' finances, and Australians' stubborn resistance to higher-density living.

No surprises there. But the other factor McAuley noted was that mortgage interest repayments had risen much faster than capital repayments, suggesting people had taken to redrawing on their mortgages for home extensions and improvements or for other purposes, pointing to "the possibility that for some, mortgage stress is the result of expanded expectations."

Yet even as increasing home prices made it harder for new entrants to the housing market, for those who already owned homes - 70-odd per cent of Australian households own outright or are paying them off - increasing prices were often perceived as a good thing.

"I am reminded of one election night, when John Howard had just won re-election, and I asked someone why he had voted Liberal, and he said, 'When Johnny Howard was elected my house was only worth $200,000 and now it's worth $400,000. He made me real well-off,'" McAuley says.

"Over the past two years, we've had a flattening, and some falls in house prices, and it's made people feel nervous."

Cartoon by Jack Chadwick

Those who watch their superannuation also will note that it has not grown much in recent years and in some cases may even have gone backwards.

And that might have something to do with the perception that we are doing it harder. People feel poorer, and are thus more likely to notice costs that are rising. That would accord with the second possible explanation of the myth of a cost of living squeeze: that homeowners' expectations, rather than prices, were rising faster than incomes.

No doubt, though, the squeeze is real for people who live in rented accommodation. The household expenditure survey data showed rents were up 41 per cent.

Other people feeling genuine pressure on the cost of living front were those dependent on government benefits, other than the aged pension, which are indexed to the CPI, not wages. And they tend to be renters.

Cassandra Goldie, CEO of the Australian Council of Social Service (ACOSS), Australia's peak welfare body can quantify their plight quite precisely.

"People on the Newstart payment are living on $30 a day, and if you take out housing costs it ends up being $16.50 to cover all of their other expenses," she says.

"And the value of that is continuing to decline because there is not adequate indexation."

She pointed to work by Peter Whiteford, of the Social Policy Research Centre, showing that as working Australians have got richer, unemployed Australians have become much poorer. In the 1990s, the dole was worth about 46 per cent of median equivalent income. By 2009-10, it had fallen to 35 per cent, well below the poverty line of 50 per cent.

ACOSS would like the government to increase the dole by $50 a week, and also to index it differently, as aged pensions are. Goldie argues this is eminently affordable for the richest nation in the world.

"Australia is one of the lowest-taxing countries in the OECD, and in terms of social security payments to people of working age, we also are one of the lowest," she said.

ACOSS has support not just from the usual suspects. Judith Sloane, Honorary Professorial Fellow at the Melbourne Institute of Applied Economic and Social Research at Melbourne University, who is usually considered an economist of the right (now also contributing Economics Editor with The Australian newspaper), also believes it not to Australia's advantage, let alone that of the people so caught, to force them into "grinding poverty."

So, it is not true that no one is feeling cost-of-living pressures in Australia. But it is true that for most people, the reality of the cost of living does not match the perception.

Economists, including Reserve Bank Governor Glenn Stevens, talk about "salience" when they address the myth of cost of living. By that they mean that there are salient prices - prices where we know what a something "should" cost - and non-salient prices - where we have little or no clue what it should cost.

Thus the price of electricity is salient, because we see the bills regularly and can make easy comparison; the price of a new vacuum cleaner, because we buy them infrequently and because there are many different models to choose from, is not salient.

And it turns out a lot of the things that have been falling in price - including shoes, appliances, electronics, pharmaceuticals, cars, computers and toys -are less salient, to the chagrin of the federal government, which has copped immense political heat over the cost of living.

A few more salient items, such as bread and milk, have fallen too in the past year.

The things that have gone up, though, are more noticeable: utilities, fruit, health, education and rent.

It matters not to consumers that economists can offer more or less reasonable explanations for many of the price movements. Utility prices, for example, actually fell through the 1990s and early part of this decade, and now are up because of the costs of new infrastructure. The sharp increase in fresh fruit prices is more due to bad weather than bad governance.

Nor does it matter that some of the increased costs are mostly attributable to value judgments made by consumers. Education is the standout example. It is rising fast because an ever-growing proportion of the population sends its kids to private schools. About one-third of Australian students now attend non-government schools, and enrolments surged more than 20 per cent in the decade to 2008. But does private education count as a necessity of life, or discretionary spending?

The answer to that question will in turn be influenced by factors like the quality of local state schools. If one lives in the more affluent areas of the capital cities, for example, the state system is pretty good. The "league tables" comparing the outcomes for public and private schools attest to this.

Of course, what one saves by going public, one spends on housing. Swings and roundabouts.

As McAuley observes: "The ABS data does not make such value judgments. They just measure the costs of the choices."

Real people are more subjective. Behavioural economics shows that the fear of a loss is more keenly felt than the anticipation of a gain. And despite Australians' current wealth, the evidence is that we look out to the world and see uncertainty.

That brings us to one final factor likely to be contributing to the perception that costs are going up. Australians are now saving again in a big way. In the middle of this decade, households were actually dis-saving, or spending more than their disposable income. Since the Global Financial Crisis, we're putting away about 10 per cent of it. We're right up there with the Japanese, says McAuley. The reasons aren't hard to see; having watched debt prang most of the developed world, we have collectively decided it is prudent to put a much greater part of our income aside than we did a decade ago.

Add it all up.

By the time we members of the vast Australian middle class have saved some 10 per cent of our income (not counting superannuation), paid for the private school fees, the house extension, the new flat screen TV, the overseas trip (did I mention the number of Australians taking advantage of the high Aussie dollar by holidaying abroad was up 13 per cent in the year to November 2011, compared with the same period the previous year, and up 34 per cent in two years?), our wallets are a little light.

Thus we notice the power bill and the price of bananas.