Soaring migration means misery has plenty of company

It’s not surprising so many people are feeling cranky, particularly those seeking rental accommodation or trying to break into the housing market. Picture: NCA NewsWire / Jeremy Piper

Trust economists to dream up something called the Misery Index. It’s the sum of the unemployment rate and the rate of inflation. The higher the total, the more miserable we should be feeling. Like golf, the lower the total, the better.

I have constructed the Misery Index in Australia over the past decade. The latest MI figure (for February) is 7.2, made up of an unemployment rate of 3.8 per cent and the monthly inflation rate of 3.4 per cent. Over the decade, the MI has been lower in some years, because the inflation rate was very low rather than the unemployment rate being particularly low. In 2016, for instance, inflation was only 1 per cent but the rate of unemployment was 5.7 per cent.

The MI peaked in 2022 when inflation really took off, although unemployment was below 4 per cent. It came close to a figure of 10. The MI is much lower now than it was two years ago. There has been a marked improvement in the MI since Labor assumed office as the rate of inflation has fallen back while the rate of unemployment has stayed very low.

Why are we all so grumpy? Believe me, people are crabby. If we use the Westpac-Melbourne Institute Consumer Sentiment Index as a guide, we find the overall index has been below 100 (100 is the neutral figure, with figures below 100 pointing to overall gloominess) since March 2022. This is “the longest streak since the early 1990s recession”, according to Matthew Hassan, senior economist at Westpac.

The (index) fell by 1.8 per cent to 84.4 in March 2024 from 86 in February. “The 12-month outlook for the economy slid 4.5 per cent (and) the 12-month outlook for family finances dropped 1.5 per cent.” In other words, the figures on consumer sentiments paint a bleak picture that, on the face of it, appears inconsistent with changes in the MI. Ironically, consumer sentiments improved during most of Covid, with figures well above 100, peaking at nearly 119 in April 2021. Federal government financial assistance – JobKeeper, the supplement to Jobseeker and other measures – is a key factor. It was also a time of very low interest (and mortgage) rates, with the first increase to the cash rate not occurring until April 2022.

Another point to make here is that the impact of unemployment and inflation on an individual’s and family’s sense of wellbeing are not the same. For those with a job, what the rate of unemployment is may be neither here nor there.

There can be concerns about the ease of changing jobs or the chances of securing a second job – increasingly common in recent times – and for the job prospects of loved ones. A lower rate of unemployment may also enhance the potential for a substantial pay rise. But, by contrast, the impact of inflation is ubiquitous. It affects the daily cost of living and the ability to pay the bills. It hits people across the board, although those on fixed and low incomes are particularly badly affected.

We had become very accustomed to low inflation; there is a whole new cohort of adults who never experienced inflation much higher than 2 per cent per year. US research indicates many people find high rates of inflation difficult to understand, equating it simply to price gouging. The fact inflation is lower than it was 12 months ago, say, does not mean prices are falling – again, something some folk find difficult to grasp.

The point here is that there is likely to be a reasonable degree of discombobulation about inflation in the population that, of itself, is probably causing irritation. The fact that even with a lower inflation rate, prices will generally not be going back to where they were before the latest inflation surge is a tough awakening. Larry Summers, former US Treasury secretary, and some of his colleagues have been pondering the disconnect between the favourable changes in the MI and poor consumer sentiments in the US and other countries. What they were able to establish is that interest rates (and linked mortgage rates) are the reason people are feeling so gloomy. In Australia’s case, there have been 13 increases in the cash rate since 2022 and mortgage repayments for some have more than doubled. The ending of the favourable fixed interest rate loan arrangements was a bitter pill for the very many who had taken advantage of these deals.

While it is true housing is the largest weighted item in the CPI, neither existing home prices nor mortgage rates are directly counted in the index. Summers makes the case for including interest rates in the consumer price index for the US. Even though most homeowners in the US enjoy fixed long-term mortgage rates, increases in the official interest rate hit new homeowners and users of credit particularly hard.

It follows naturally why Treasurer Jim Chalmers is sweating on the Reserve Bank cutting the cash rate later in the year; it looks like the only sure-fire means of cheering up consumers (and voters). But the signs from overseas are not entirely propitious as the US Federal Reserve chair, in particular, shows no indication of rushing to cut the official rate there. The recent stickiness of our CPI, particularly in relation to inflation in the services sector, is also not helpful.

There is one thing government could do that would be helpful and that is to act decisively to cut net overseas migration. Indeed, it should have moved on this front early last year, but the indications are that there is a marked reluctance on the part of the government to do so. Recent figures point to both the numbers of international students and temporary migrants here being at all-time highs.

The prediction that NOM will come in at 375,000 this financial year looks increasingly fanciful with the most recent annual NOM figure (September quarter 2023) recorded at close to 550,000. The stress on the rental market and demand pressures more generally are themselves pushing up inflation. There is a strong case for putting the Misery Index out of its misery. There are better measures of how people are faring – real net national disposable income per person, for instance, which takes into account inflation and mortgage payments. And we know this measure has been going backwards. It’s not surprising so many people are feeling cranky, particularly those seeking rental accommodation or trying to break into the housing market.