Energy, inflation, rates, housing: how to handle gloomy forecasts

Budget predictions of power prices surging 56 per cent were a painful shock for Australians already worried about inflation, investments, interest rates and house prices. Here’s how to cope.

Power prices are forecast to surge by 56 per cent over two years, while property values have been tipped to plunge 20 per cent as interest rates continue rising sharply.

Inflation is at a 32-year high and forecast to go even higher, and there are continuing warnings that a nasty stockmarket downturn is coming.

If you’re freaked out by people forecasting financial gloom for your household and investments, now is a good time to consider this: the numbers are unlikely to come true.

They are simply someone’s predictions, and should only serve as a guide to what may happen and a warning to be prepared for it.

Many people who’ve watched economies and financial markets for several decades know that forecasts are wrong just as much as they are right.

When Covid-19 struck in 2020 there were forecasts that property prices would plunge 30 per cent. Instead, they boomed.

Australia’s own Reserve Bank was previously signalling that its official cash rate would not rise until 2024. Instead, it has jumped from 0.1 per cent to 2.6 per cent since May and is likely to be above 3 per cent by Christmas – possibly as early as Melbourne Cup Day.

Cash rate forecasts among the big banks vary widely, from a maximum of 3.1 per cent by next year to 3.85 per cent.

Financial crystal balls have been wrong on many occasions.

Our stockmarket is down about 8 per cent in the past year and performing better than many overseas markets, so it may play catch-up to their downturns. During the Global Financial Crisis in 2008 and 2009 many investors believed the forecasts that our market would drop about 20 per cent, then were burnt badly as it plunged 55 per cent.

For Aussie households right now, hits are coming from all directions, and everyone is slipping backwards financially.

People with cash in the bank may be happy that they are finally getting decent deposit interest rates after years of almost nothing, but that’s being offset by inflation rising faster than the value of their deposits.

It’s understandable that Australians want higher wages to help offset the immediate pain, but is it worth it if that leads to a wage-price spiral where wages go up, prices go up to cover them, wages go up again, price inflation goes up again, and so on?

Soaring energy prices are a worry, but can anybody really predict where they will be in three years given the Russia-Ukraine war and global shift to renewables? Australia’s government has said all options are on the table when it comes to limiting power price rises.

Strategies to handle the current huge amount of financial uncertainty include:

• Monitoring all your spending and understanding where every dollar goes, so you can spot potential savings if things get worse.

• Setting a budget, which will be your map of future expenses, but acknowledging it should be flexible to adjust to fresh pressures.

• Understanding that many of the current pressures should be short-term. This year’s barrage of interest rate rises only recently started flowing to households, and a reversal may come sooner than many think.

• Seeking financial help early, if you need it, from your lender’s hardship teams or free financial counselling services on 1800 007 007.

The key message is to treat scary forecasts as only a guide, and a warning of what may lay ahead, but always prepare for alternative outcomes – because in most cases they are just as likely.

Originally published as Energy, inflation, rates, housing: how to handle gloomy forecasts