Why inflation is surging in Australia – and what it means for interest rates
Inflation is surging at the fastest rate in decades, and that’s bad news for homeowners with a mortgage. We explain why – and what will happen next.
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Surging inflation isn’t just bad news for household budgets – it will inevitably lead to a double-whammy for homeowners with a mortgage as interest rates start rising.
The Consumer Price Index rose 2.1 per cent this quarter and is up 5.1 per cent in the past year – that’s the fastest rate that prices have risen in more than 20 years.
The main economic lever used to rein in inflation is increasing official interest rates, which have stalled at a record low of 0.1 per cent for the past 16 months.
So rate rises now seem inevitable. The only question is how much, and how soon?
The Reserve Bank has traditionally been reluctant to hike interest rates when an election is imminent, and an increase next Tuesday – just 18 days before the election – would dramatically shake up the campaign.
But some senior economists say this inflation figure is so startling the Reserve Bank needs to act immediately – and should consider a rate rise higher than the traditional 0.25 per cent.
Rising interest rates takes disposable income out of the economy, in theory cooling the rampant demand that is pushing inflation beyond the RBA’s target band of 2-3 per cent.
Westpac economist Bill Evans expects a 40 basis point rise to 0.5 per cent on Tuesday. Others say the Reserve would probably have preferred to wait until June, but is now under pressure to assert its independence by pulling the trigger next week.
It is also possible that the Reserve will play it politically safe with a modest rise of 15 basis points to 0.25 per cent.
Banks will swiftly pass on any rise to customers (potentially with an extra rise above the official rate), meaning some first home buyers are about to experience their first taste of rising monthly mortgage repayments.
Two other looming figures will throw an even sharper focus on the economy in the dying days of the election campaign – the next Wage Price Index is due on May 18 and April’s unemployment data comes out on May 19, just two days before election day.
Rising inflation in Australia has been underpinned by the red-hot housing market and rising construction costs, and an 11 per cent increase in the cost of fuel mostly attributed to Russia’s invasion of Ukraine.
But food is also surging in price, with various categories of food costing between 1.8 and 5.8 per cent more this quarter alone.
The boss of one of the nation’s largest independent supermarket chains said on Wednesday he knew rising food prices were starting to hit household budgets when he noticed more customers buying mince meat.
“What that is telling us is that your budget-focused people are cooking and eating more spaghetti bolognese, lasagne, that kind of thing,” said Ritchies chief executive Fred Harrison.
Mr Harrison, who runs the Ritchies network of 75 supermarkets and 65 bottle shops across Australia, said prices in some food categories like fresh produce had increased up to 10 per cent.
“In the last two months or so you are seeing produce prices up about 9 or 10 per cent within the shopping basket,” he said.
Australia isn’t alone in confronting the threat of inflation – in the US, prices are rising as the fastest rate in 41 years, up 8.5 per cent in the past 12 months.
Here it’s hitting households unevenly, with prices rising at a slower rate in Sydney (1.7 per cent) and Adelaide (1.9 per cent) than Brisbane (2.2 per cent), Melbourne (2.3 per cent) or Perth (3.3 per cent).
But the bottom line for most Aussie households is be prepared to tighten your belts – and consider asking your boss for a pay rise.
Many of us will have to get used to having less disposable income in coming months, especially those with a sizeable mortgage who aren’t on a fixed interest rate.