Inflation is a hotly discussed issue right now and you may be wondering what it really means and how it affects you. Australia is experiencing record levels of inflation because of knock-on effects from the COVID-19 pandemic, the war in Ukraine and strong consumer demand. The Australian Bureau of Statistics (ABS) reported that the annual Australian inflation rate is 6.1%, which is the highest recorded since 1990. With forecasters predicting it to peak at 7.75% in December 2022, it is important to understand how this will impact you.
A major indicator of economic performance, inflation is a key driver behind economic policy which is set by the government and the Reserve Bank of Australia (RBA). Changes affect individuals and businesses largely because inflation increases the price people pay for goods and services. This is happening now.
What is inflation?
Inflation is the increase in price of the same item from one point in time to another. It is generally measured on a quarterly or annual basis. For the most part, prices tend to rise over time, but they can also fall, which is known as deflation.
To put inflation in context, if you were to buy an item for $100 today and the same item cost $103 on the same day next year, inflation for the year on that item would be 3%.
How is inflation measured in Australia?
A key indicator of inflation in Australia is the Consumer Price Index (CPI), which is the measure of different categories of household expenditure. This is calculated by the Australian Bureau of Statistics (ABS).
How is inflation being managed?
When inflation rises, the Reserve Bank of Australia use the interest rate lever, to curb inflation. The RBA have consistently announced they will continue to raise the cash rate until inflation is manageable. The cash rate at the start of the year was .10% and is now 2.35%. This has a direct impact on interest rates on loans and mortgages.
What does the current rise in inflation mean for you?
MORTGAGES
If you have a variable rate mortgage you may be starting to notice the cost of your monthly payments is rising due to increased interest rates. If you were lucky enough to lock in a fixed rate of 1.99% in the last 2-3 years, you may not be feeling the pinch yet. However once the fixed term matures, you may be in for a nasty surprise with fixed rates currently ranging from 5.04% - 6.05%, depending on the term.
Interest rates have increased from .1% to 2.35%
WAGES & JOB SECURITY
High inflation reduces your purchasing power as the value of your earnings is lowered. Many employees are seeking wage increases to compensate for the higher cost of living. This has a knock-on effect on businesses which can lead to them increasing the cost of their goods and services.
If inflation remains persistently high, as to the cost of borrowing, businesses may be required to reduce costs which could lead to job losses. Currently unemployment is at record lows however we could see a spike if inflation continues.
COST OF GOODS & SERVICES
Inflation has a direct impact on the price of the goods and services we use daily. As costs increase for businesses, this is generally passed onto the consumer. On average the price of goods and services is up 6.1% with staple items such as fuel, fruit and vegetables and furniture up over 5% for the June Quarter. The Guardian also provides a detailed summary of the impact inflation is having on the cost of living.
The cost of living is increasing in this environment. The RBA’s inflation calculator can be a handy tool for gauging how much general expenses are going up.
MARKET VOLATILITY
As witnessed since the FED and RBA’s first announcement of inflation, markets have been volatile. When inflation is high, uncertainty exists around business growth, economic growth, unemployment - the list goes on. While inflation is present, we are still likely to experience these ups and downs. The current RBA forecast implies inflation will return to the target 2-3% by late 2023 however as history suggests, you can’t always rely on these forecasts.
We recognise that the current environment may appear daunting. Speak to your adviser about the appropriate strategy for your circumstances. Our job is to cut through the complexity and to provide peace of mind. Get in touch.
General Advice Warning: The information provided in this article is general in nature and does not take into account your particular investment objectives, financial situation or insurance needs; we therefore recommend you seek advice tailored to your individual circumstances before making any specific decisions.
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