The cost-of-living crisis isn’t getting any easier. Here’s how inflation and interest rates are impacting us

 In Home News Section, Home Slider Section, Uncategorized

In what will be unhappy news for many, all four big banks are tipping the RBA will lift interest rates at its November meeting.

If you’re struggling to pay rent, buy groceries and fill your car up with petrol, the news might concern you — and you’re far from alone.

Miriam Jay, a financial counsellor at the Financial Rights Legal Centre, is receiving more calls than ever from people in distress.

Many are employed, but still not able to make ends meet.

“We’re hearing a lot, not so much from people who’ve lost their jobs, but people who are working full time,” she tells ABC RN’s Life Matters.

“We’ve started to refer people to emergency relief places and food banks, so they can at least eat something.

“It’s pretty dire, some of the calls are pretty terrible.”

How did the cost of living crisis spiral to this point? And is there any relief in sight?

We need to talk about inflation

Inflation refers to the increase in prices of goods and services, and the rate of change of those prices.

One indicator of inflation (also the most well-known) is the Consumer Price Index (CPI), which measures how much a typical “basket of goods and services” costs an Australian household.

Included in the “basket” are things like rent or mortgage, food, transport and health services.

If those costs increase over the course of a year, they can be expressed as a percentage. For example, you could say (without using real figures) that annual inflation for food is four per cent.

Why is inflation so high?

Joey Moloney, a senior associate in economic policy at the Grattan Institute, says inflation happens when “there’s too much money chasing too few goods and services”.

“It’s an imbalance between the aggregate supply of things available to buy, and the aggregate amount of money available for people to spend.”

Moloney says during COVID-19 lockdowns, a number of people on middle and upper incomes built up a significant amount of savings.

But on the flipside, there were issues with the availability of goods and services.

The pandemic significantly disrupted supply chains and, later, the invasion of Ukraine contributed to a global energy crisis.

In other words, “demand” (money) started outstripping “supply” (goods and services).

Together, Moloney says, these forces contributed to the “inflationary spike” that is causing many of the issues Australians are grappling with now.

Why haven’t we got a handle on inflation yet?

Those lucky enough to have saved money during the early days of COVID were free to spend their savings once lockdowns lifted, for example by going on holidays.

But Moloney says it has taken a “huge amount of time” for that money to start filtering back through the economy.

Then there’s the fact that wage growth has been stagnant for so long, and is only picking up very slowly.

“We’re still in a state where inflation is outpacing wage growth, which means that in real terms, people are actually getting poorer,” says Moloney.

“I don’t think any economist was expecting that to still be the case today.”

So how do we get inflation down?

That’s the tricky part. As Moloney puts it, “there’s no costless way to get inflation down”.

In Australia, inflation has primarily been controlled by raising interest rates.

This has the flow-on effect of making home owners’ mortgages more expensive, which Moloney admits seems “counter-intuitive”.

“I think people look at that and they’re like, ‘OK, so everything’s getting more expensive, and your solution is to make my house more expensive. I can’t quite compute that.'”

The logic behind raising interest rates, he says, is to “try and get aggregate demand and supply back in balance”.

“The tool that we have to do that … is to make people pay more on their mortgage, which takes money out of the economy.”

The idea is people spend less, demand for products decreases, and prices can readjust (and reduce) accordingly.

Are wealthier people driving up inflation?

Moloney argues that there is “intergenerational unfairness” in the way the financial situation is currently playing out.

Data shows that as prices are going up, younger people are pulling back their spending.

On the contrary, spending has increased for older households, especially retirees.

Moloney explains this by saying that rising interest rates are more likely to affect “younger middle-aged households with big mortgage debt”.

“Retirees [generally] don’t have mortgage debt,” he says.

“And wealthy retirees typically have substantial assets or cash in the bank.”

With higher interest rates, those same people are getting a “higher return” on their assets, creating a self-perpetuating cycle which increases their spending power again.

Of course, this is not true for all older people.

Women over the age of 55, for example, continue to be the fastest growing cohort of homeless people in Australia.

This is due to a range of factors including the gender pay gap, lack of superannuation, the gendered imbalance in caring responsibilities (for children as well as parents) and more.

Banks, on the other hand, are also beneficiaries of high interest rates.

“It’s fair to say that some of [the money] will show up, at least in the short term, in a bank’s profit margin,” Moloney says.

Are there other ways we can bring down inflation?

In short, yes, but Australia traditionally has a strong preference for using interest rates to control inflation.

To understand why, Moloney explains that we are an “international outlier” when it comes to variable rate mortgages.

Some countries have lower home ownership rates (meaning fewer mortgages), while others have a high number of home owners, but they tend to be on fixed rate mortgages.

In Australia, by contrast, interest rates are only fixed for short periods at a time.

This means how much you pay on your mortgage is heavily impacted by changing interest rates.

“So the degree to which interest rates flow through to the household hip pocket is reasonably powerful in Australia,” Moloney says.

There are other options, but they’re not fool-proof.

One alternative is to increase the compulsory superannuation rate.

As Moloney explains, having less money available to spend each pay “removes money from the economy”.

However, there are equity issues with this model.

“If you increase the super guarantee rate, you are clipping everyone’s pay to an equal degree,” he says.

“The people probably doing it toughest at the moment are people in private rentals facing increasing rates, high inflation and not seeing much of a pay rise.”

In other words, the people who can arguably least afford it would be taking a hit to their take-home pay.

When are things going to get better?

It might take a bit longer, unfortunately.

The RBA isn’t forecasting for inflation to return to its “target” level (between two and three per cent) until 2025.

And there are reasons we can’t move more quickly.

“If you do it really aggressively, really quickly, you risk a spike in unemployment, which means you’re essentially risking a recession,” Moloney says.

“The RBA are trying to engineer a ‘soft landing’: bringing inflation down but maintaining unemployment as low as it can sustainably be.”

Until then, what can we do?

If you’re in need of help and don’t know where to start, you can call the National Debt Helpline on 1800 007 007.

Aboriginal and Torres Strait Islander peoples, meanwhile, can call Mob Strong Debt Helpline on 1800 808 488.

Both helplines are free and open Monday to Friday, 9:30am to 4:30pm.

The Federal Government website Moneysmart provides information on food and bill support, crisis payments, and organisations in different states and territories that can assist with emergency temporary accommodation.

Miriam Jay also advises starting “to talk to your creditors, before you actually get into strife”.

“So, [talk to them] before you fall into arrears or before you’re in default, and on the brink of receiving a default notice.”

Jay also advises utilising the Australian Financial Complaints Authority (AFCA), which is “the external dispute resolution scheme people can get help from if they’re not getting anywhere with their lender or their creditor”.

She’d like to see the AFCA, and other organisations helping people who are struggling financially, receive more government funding to enable them to provide more support.

By Kate O’Halloran and Sky Kirkham for Life Matters (Original ABC Article)