Last week, we learned just how much the cost of living has risen in Australia, when the Australian Bureau of Statistics unveiled the June quarter numbers.
In the last reporting period to March 2022, inflation sat at around 5.1 per cent. Last week, it went up to 6.1 per cent …certainly hurtling towards the estimates of seven per cent by December.
On Tuesday, we’ll get another jolt. The RBA is meeting to set yet another interest rate rise. It could be as high as 0.75 basis points.
What that all means is just about every aspect of your personal finances will be changed, from your home loan to your salary and savings.
House prices will fall – already, Sydney has plunged 1.9 per cent in a month. Your groceries will surge – milk has already gone up at all supermarkets, your home loan will rise…but your pay probably won’t.
Inflation is important because it effectively determines the RBA’s actions and whether or not they will hike rates. If they raise rates then mortgage holders have higher repayments and first home buyers have reduced borrowing capacity, which effects the housing market.
In the US, inflation sits at 9.1 per cent, the UK 8.2 per cent and 7.3 per cent in New Zealand.
But the omens are ominous.
For the sake of avoiding heart failure or panic, the RBA does not expect the board will need to follow the United States in lifting the cash rate by 75 basis points.
But the ANZ this week forecast the cash rate will be at 3.35 per cent by the end of the year. On the July 5 the RBA increased the official cash rate by 0.50 per cent. The current official cash rate is 1.35 per cent. A seven basis points rise would lift that to 2.10 per cent.
Here’s what the experts say:
Philip Lowe, RBA Governor: “In the next little while, we’re going to need to have further increases in interest rates. A cash rate of 1.35 per cent in an economy with inflation that’s soon to be six and perhaps seven per cent and an unemployment rate of 3½ per cent. You know, we need higher interest rates.”
ANZ head of Australian economics, David Plank: “ANZ Research does think moves of more than 50 basis points in August or September are a very real possibility although not the central case. This could be a move of 75 basis points or even 65 basis points if the RBA wanted to “round” the cash rate target to 0.25 per cent.”
Commonwealth Bank head of Australian economics, Gareth Aird: “There are no two ways about it – inflation is red hot in Australia right now, as it is in many parts of the world, and the RBA will respond by raising the cash rate again at the August Board meeting next week. Our central scenario for the RBA to raise the cash rate by 50bp at the August Board meeting is unchanged.”
Countries around the world are experiencing high inflation because of supply and demand pressures brought about by the COVID pandemic. The cost of some goods has risen dramatically, meanwhile others have gone down. The Australian floods and the war in Ukraine have also led to supply chain issues, which have pushed prices up.
The RBA cannot do anything about supply, so they use interest rates to try and control demand. If demand is lower then prices stay the same or decrease.
If inflation is too high then the RBA increases interest rates to try and control it. In the fourth quarter of 1951, inflation reached a record high of 23.90 per cent, and a record low of -1.30 per cent in the second quarter of 1962.
Central banks around the world want to avoid what happened in the 1970s, when inflation led to a cycle of higher wages and inflation that lasted through to the 80s.
If however the RBA increases rates too fast there is a real risk of a recession – when the economy contracts, jobless rates increase and a spiral downwards makes it harder to recover.
The US economy will probably be in technical “recession” by the end of this week – currently defined as two consecutive negative three month periods.
While addressing the economy tomorrow, Mr Chalmers is also expected to provide details about what the government will do to ease the burden faced by households. His speech will set the tone on what the average Aussie can expect when it comes to their finances.
In the meantime, Really Simple Money has assembled articles to help: