Inflation, not rates, the ‘killer’ for household budgets

A former top Reserve Bank official says Jim Chalmers is wrong to blame higher interest rates for the collapse in economic growth.

Jim Chalmers has blamed high interest rates for the collapse in economic growth. Picture: NewsWire / Martin Ollman

High inflation, not interest rates, has been the “killer” for household budgets, a former top Reserve Bank official says, after Jim Chalmers blamed the central bank’s actions for the collapse in economic growth to the weakest in over three decades outside the pandemic.

National accounts figures on Wednesday showed the economy came close to stalling in early 2024, with growth in the year to March slowing to just 1.1 per cent and, excluding the Covid-19 downturn, the lowest since early 1992 when the nation was emerging from recession.

Following the official figures, the Treasurer repeatedly asserted climbing mortgage payments were the greatest drag on growth.

“The economy’s slowed considerably, the primary reason for that is higher interest rates,” Dr Chalmers said.

He then added there were “some other reasons, too”, including the volatile global economic backdrop and “the persistence of inflation even as it’s moderated from those high peaks a couple of years ago”.

But Challenger chief economist Jonathan Kearns said “the biggest impact on real household income has been the increase in consumer price inflation – that has been the absolute killer for how much households have got to spend”.

Dr Kearns, who spent 25 years at the RBA before joining the private sector in early 2023, said the national accounts showed household incomes increased by 6.7 per cent in the year to March.

The increase in mortgage interest payments in that period knocked 1.7 percentage points off that growth. In contrast, inflation dragged households’ spending power by about 4.5 percentage points – or nearly three times the impact of rates.

After accounting for the impact of taxes, offset by growth in other sources of earnings, real disposable income barely grew over the 12 months.

Adjusting for a rising population, growth in real disposable income on a per person basis – a better measure for the experience of individual households – fell nearly 2 per cent in a year.

“It’s not surprising that households are feeling morose,” Dr Kearns said.

While higher mortgage rates hurt a third of the roughly 10 million households with home loans, high and rising consumer prices make life more difficult for all Australians, he said.

“It certainly contributes to flatter growth, because it reduces the disposable income households have. It affects household sentiment and confidence. There’s a reason why we want to have low and stable inflation: we have deduced that is how economies operate best.”

RBA governor Michele Bullock in Senate estimates this week said while higher borrowing costs have made it harder for many Australians, letting inflation stay high would be even more damaging. “The best thing I can do for everyone, including all the young people who are being hurt by this, is to get inflation down.”

The analysis comes as new data showed landlords continued to power a sharp rise in new home loan commitments, as property prices forge higher despite higher interest rates.

New loans to investors – excluding refinancing – climbed by 5.6 per cent in April to reach $10.9bn, or 36 per cent higher than a year earlier.