It was a headline designed to spread alarm and bring the upcoming Budget into sharp focus. And it worked!
Never mind the war in Ukraine or the floods and climate change mayhem.  According to The ABC, Australians could be forced to pay up to $7 for a regular flat white cup of coffee, thanks to cafe bar costs.

Cafe Owners and Baristas Association of Australia president David Parnham made the prediction , who said the price for an average flat white around the nation could jump to $7 by the end of the year.

He told the national broadcaster: “What’s happening globally is there are shortages obviously from catastrophes that are happening in places like Brazil with frosts and certain growing conditions in some of the coffee-growing areas.”

It’s all about the cost of shipping and the global shortage of containers. The average $4 price for coffee paid at the moment was long overdue to increase, he said, but during the [pandemic cafe bars were just too worried about trade to pass on the cost.

Now Mr Parnham may not have realised that many have written books about the cost of coffee and its effects on ordinary Australians’ finances. Many believe giving up coffee is the key to wealth – the idea being you could invest the cost of coffee and make more in compound interest.

At $7 a cup, even Warren Buffet might think that would be right.

It’s two weeks out from the Budget that the Federal Government is relying on to swing back the polls and save Scott Morrison’s leadership of the Liberal Coalition. That cup of coffee could cost him dear at the polling booth.

Australian families are grappling with the worst inflation rates in more than a decade. Petrol prices, Woolies veggies and the cost of housing are all adding to enormous pressure on the family budget while wages are still low.

It isn’t over yet. In China, where most of our goods are made, 50 million workers are locked up as the country’s leaders try and wipe out COVID – something we’ve given up on. So your iPhone and a lot more besides are going to be more expensive

The  Australian Bureau of Statistics says the consumer price index rose 1.3 per cent in the final quarter of 2021 and 3.5 per cent annually.

Oh, and did I mention Europe is engulfed in a war?

The Treasurer Josh Frydenberg has reportedly put back plans to bring forward stage-three tax cuts for middle and ­higher-income earners, instead favouring  more ­targeted ­help to ease cost-of-living pressures.

Quite what that means we’ll know in two weeks time. But make no mistake:  women and families are likely to be winners. There is going to be a bid to win over the female vote.

Right now, we’re lucky. Yes, lucky! Reserve Bank Governor Philip Lowe may seem a boring man in a grey suit, but right now he is the man I’d be inviting round for a dinner party.

But it’s not going to be easy.

Ok – so what should you do?

We’ve already advised locking in home loans if you can. These are record low rates, people, so keep them as long as you can.

But here’s what is really important:

What you are paid

One of the big problems today is that wages, salaries – whatever you call it – are low.  And when they go up, you get more money…but you pay more for goods because the workers who make the goods are paid more.

Wages growth – hopefully – moves with inflation, generally a percentage point or so ahead. But that hasn’t happened.

The latest wages data came out at an annualised 2.2% for the September 2021 quarter, at a time when headline inflation was 3%.

That means you took a pay cut.

How you invest

Much as we’d love to suggest that all of us are brave Warren Buffets, we’re actually mostly savers.

The news for savers has not been good for some time now. In fact, the market has managed to make that method of dealing with money espoused by your mum look plain silly.

If you got 2% this year, you were lucky. Not sensible – just lucky. It’s why most of us have turned into day traders – and why Crypto, however risky (we don’t like Crypto!) looks like a sensible bet.

Guess what. Inflation might make savings look good (sadly, you’ll probably pay it out in increased prices).

Here’s what the Reserve Bank tell you about the effects of high inflation:

  • Consumers’ purchasing power – the real value of money – is reduced. If prices are increasing faster than people’s nominal incomes, they will be able to afford fewer goods and services over time.
  • Workers may then seek larger wage increases to compensate for the effects of higher inflation on their purchasing power. In turn, higher wage growth raises firms’ costs, which may lead firms to raise prices further and/or reduce the number of workers they employ.
  • Spending and investment decisions may be distorted. This is because high inflation can influence when households make purchases or businesses make investment decisions. For example, if households expect higher inflation, they may make purchases sooner than originally planned to avoid paying more.
  • Returns on investment may be lower. Inflation influences investment decisions because a higher inflation rate will reduce the real return on the investment. Inflation can also affect the real interest paid by borrowers to lenders. For example, if inflation turns out to be higher than expected when the loan was agreed, the lender will get less than they had planned because inflation reduces the purchasing power of the interest earnings they receive.
  • Businesses need to update their prices more frequently and consumers spend more time comparing prices. This increases their uncertainty about the economy, which may discourage spending and investment and reduce economic growth.
  • A country’s international competitiveness may be lowered. If inflation is higher in one country, then the goods and services it produces will become more expensive compared with other countries (unless its currency depreciates). For more on exchange rates, see Explainer: Exchange Rates and the Australian Economy.

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