Inflation costs that are keeping your mortgage repayments high

Headline inflation has risen for the first time since 2022, but the pain for borrowers may not be as bad as many fear.

Inflation is hurting households with big mortgages. Picture: iStock

It wasn’t supposed to be like this.

Nine months ago, economists and other forecasters were tipping home loan interest rates would start dropping around mid-2024, as the high inflation that peaked in 2022 was falling steadily.

Fast forward to today, and the latest Consumer Price Index figures from the Australian Bureau of Statistics show inflation climbing again.

For the millions of borrowers battling a 62 per cent rise in mortgage repayments since mid-2022 courtesy of 13 Reserve Bank interest rate rises, it feels like a kick in the guts.

Relief from the 4.25 percentage points of rate rises over the past 26 months now seems further away, especially as both goods and services inflation ticked higher in the June quarter, according to the ABS data.

While annual headline inflation has increased from 3.6 to 3.8 per cent, the ABS’s “trimmed mean” measure of underlying inflation, which is the RBA’s preferred gauge, fell from 4 to 3.9 per cent.

It’s led most economists to forecast the RBA won’t raise its official cash rate at next week’s board meeting, but current inflation levels suggest we may have these higher interest rates for longer still.

Today’s inflation rate is well above the RBA’s 2-3 per cent target range, and given it’s being boosted by rising wages and tax cuts, households and business may be stuck in this holding pattern for longer than anyone wants.

Financial markets on Wednesday were pricing in an RBA rate cut by February 2025, but battling borrowers have heard all this before.

Some economists tip rate cuts before December, while others say “we are not out of the woods” amid the threat of another rate rise.

Whatever happens in the months ahead, it’s worth looking at the key causes of Australia’s persistent inflation, because it provides an argument supporting no further RBA rate rises.

The ABS says the biggest drivers of annual inflation now include education (up 5.6 per cent annually), insurance and financial services (up 6.4 per cent), health (up 5.7 per cent) and alcohol and tobacco (up 6.8 per cent).

These are not typically areas where rate rises can slow the rate of inflation, because they are largely set by the governments or are indexed to past inflation. Rate rises have more of an impact on discretionary spending areas such as furnishings and household goods (down 1.1 per cent annually), recreation and culture (up 0.9 per cent) and communication (up 1.4 per cent).

Health costs climbed 5.7 per cent over the past year. Picture: iStock

In theory, rate rises should also dampen housing costs, but these have climbed 5.2 per cent over the past year, according to the ABS data, amid a sharp population increase and Australia not producing enough housing supply for buyers and renters.

Hopefully the RBA factors these pressures into its next rate decisions and does not smash people with big mortgages – generally younger and more recent homeowners – with another painful rise.

It’s not just mortgage borrowers who are battling higher repayment costs. Business collapses are rising sharply – especially in sectors that rely on discretionary income, such as retail and hospitality. And the economy has been going backwards on a per capita basis for a while now.

Yes, annual inflation has increased for the first time in 18 months, but the details within the data suggest a rate rise in August is unlikely. Beyond that, who knows?

Originally published as Inflation costs that are keeping your mortgage repayments high