Most of us have probably experienced a moment when the cost of living hit home.
You may have been at the supermarket checkout, or the petrol station, or opening your energy bill.
It hits you right in the guts, and your inner monologue says: “That’s too much, but what can I do?”
We can measure this bill shock — it’s inflation or the Consumer Price Index (CPI). The Bureau of Statistics measures it at 5.1 per cent.
Treasurer Jim Chalmers says this “skyrocketing” inflation will “get worse before it gets better”.
So, what’s causing it? How high can it climb? And, realistically, can we cope with it?
As it gets colder across the country, households are fretting about their energy bills.
Last Thursday the peak “average spot price” for electricity — the wholesale price — rose to $733/MWh in New South Wales and $708/MWh in Victoria.
The price of unleaded petrol is hovering 10 cents below and above $2 a litre.
CoreLogic’s March Quarterly Rental Review showed its national rental index increased 2.6 per cent for the quarter and 8.9 per cent over the year — the fast annual growth since 2008.
The Reserve Bank has also now increased its cash rate target by 0.75 percentage points over the past two months, increasing mortgage repayments by hundreds of dollars each month.
And that’s not to mention the rising cost of daily and weekly food shopping.
It’s not an exaggeration to say millions of Australian households are needing to foot hundreds of extra dollars a week to keep a roof over their head, keep the lights on and put food on the table.
To add insult to injury, the official data shows wage growth is barely budging.
More recent commentary from the Reserve Bank suggests wage growth is lifting, but it’s unclear by how much.
What can we blame? Well, the pandemic and supply bottlenecks, the effects of climate change on crop production (including a heat wave in India), and the war in Ukraine as well as Western sanctions on Russia.
And there’s worse to come
The concern is that many of these problems aren’t going away, with the effects of the war in Ukraine particularly concerning.
Ukraine’s exports of grain and oilseeds have mostly stopped and Russia’s are threatened.
That’s a big problem when you consider Russia and Ukraine supply 28 per cent of globally traded wheat, 29 per cent of the barley, 15 per cent of the maize and 75 per cent of the sunflower oil.
The two countries supply 12 per cent of all globally traded calories.
European Council President Charles Michel accused Russia of using food supplies as “a stealth missile against developing countries” and blamed the Kremlin for the looming global food crisis, prompting Moscow’s UN ambassador to walk out of a Security Council meeting.
It’s all sent the cost of food soaring.
Wheat prices are now up well over 50 per cent since the start of the year.
But given the other forces driving every cost higher, inflation more broadly is set to continue to climb.
Here in Australia, the National Australia Bank forecasts inflation to reach 5.7 per cent by September.
The Reserve Bank had previously said inflation will top out at roughly 6 per cent, but on Tuesday it revised that forecast: “Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago.”
Can we cope?
The obvious question to ask, then, is given few Australians are getting pay rises large enough to boast about, can we absorb the extraordinary cost of living increases?
The answer is, yes, many can — or so says Reserve Bank governor Philip Lowe: “The Australian economy is resilient, growing by 0.8 per cent in the March quarter and 3.3 per cent over the year.”
“Household and business balance sheets are generally in good shape.”
This is largely because households chose to save a proportion of the COVID-19 federal government stimulus payments and, for that matter, continue to save.
The March National Accounts showed the household saving ratio fell quite a bit from 13.4 per cent to 11.4 per cent, but remains relatively elevated.
The commercial banks, including the Commonwealth Bank, also report mortgage borrowers are months ahead in the repayments — think tens of thousands of dollars in offset accounts.
So why then are many Australians, well, kinda miserable?
The ANZ consumer confidence dropped 4.1 per cent last week, “most likely on cost of living concerns as inflation expectations rose to 5.7 per cent, its highest weekly reading since early April.”
“Consumers are especially pessimistic about the current economic outlook and their current financial circumstances,” the bank’s Head of Australian Economics David Plank said.
Let’s be real for a moment.
It all boils down to a simple notion: savings are finite, but income growth does not have to be.
That is, so long as incomes are beating or keep pace with inflation, households can manage elevated levels of debt — but if wage growth remains relatively subdued, a big problem emerges.
Households are faced with debt that is rising in cost and a shrinking pool of savings to draw upon to meet repayments.
There are also other household bills and expenses accelerating that shrinking pool of savings.
What happens later?
The reality is that many households are OK for now, there’s cash to be drawn, and that may provide a buffer for a good few months.
But what happens later this year?
The cost of living is rising, wages are not keeping pace, and the mechanism many households are currently using to bridge the gap — savings — is shrinking.
“Higher costs for food, fuel and finance are likely to see household savings continue to taper as families funnel more of their income towards servicing their mortgage and funding essential costs of living,” CoreLogic Research Director Tim Lawless says.
Not to mention that some Australians are living on $46 a day under the Job Seeker program. The Australian Council of Social Services (ACOSS) says these people are in some cases choosing food or heating on a daily basis.
And now renters face the double whammy of absorbing rising rents and stagnant wages while desperately trying to get a foot on the property market ladder.
They may welcome the new government’s housing policy on shared government ownership in their home.
The bottom line
There’s a lot to digest and a fair bit keeping us all up at night.
Here’s the bottom line: until a mechanism is put in place to compensate millions of employees for their hard work — productivity is now sitting at 2.8 per cent — millions of households will face a significant financial squeeze later this year.
The hope is that price pressures in the economy will ease, but that may also come with higher borrowing costs.
The data shows many Australians are grinding their teeth and biting their fingernails as they look at their budgets.
If that’s you, one consolation is you’re far from alone.
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