Why is Australia’s Inflation Rate So High?

Australia is experiencing record levels of inflation as a result of knock-on effects from the COVID-19 pandemic, the war in Ukraine and strong consumer demand.

We are set to forecast up to 8% by Dec 2022.

In Australia, the most significant price hikes have been in dwelling purchases by owner-occupiers, automotive fuel, furniture and fruit and vegetables, according to June quarter figures released by the ABS.

Inflation is high in Australia due to a combination of factors. The economic recovery from the global recession caused by COVID-19 lockdowns has been stronger than expected, which is partly due to the government providing long-term emergency stimulus packages, such as the JobKeeper payments, Supperannuation withdrawals, Covid pay outs & Home Builder grants ect.

Inflationary shocks are being felt acutely now because in the 20 years leading up to the pandemic, prices were mostly trending downwards. This was because the manufacturing of ‘big ticket items’ (known as consumer durable goods) were moved from the West to the developing world, where overheads are lower. Most people didn’t notice until prices shot up, because these big-ticket items are generally bought infrequently most of the time. When lockdowns were imposed, there was a dramatic surge in demand for products such as computers and home fitness equipment, DIY renovations & materials and more.

People couldn’t go to the cinema for example, so they bought better entertainment equipment. People were spending more time at home and decided to renovate. They didn’t want to catch public transport, so they bought cars. There was all this demand-shock and governments threw a lot of money at people, which meant that they could afford to buy these things.

For some people, the lack of opportunities to spend money during lockdowns helped them to accumulate considerable savings. Others saw their livelihoods and savings wiped out.

Businesses, Sole traders and Employers suffered but for employees some made more money than ever, saved more money than ever & took advantage of the blanket give aways from the government when it likely wasn’t needed. Even with steady income they had options to pause bills, defer payments, rents and simply save save save & spend on big ticket items that they always wanted and could suddenly afford.

At the same time, the lockdowns caused factories to close virtually overnight, which led to supply shortages. Shipping costs surged by 400% because many ships were taken out of service. Russia’s invasion of Ukraine has put additional upward pressure on prices of oil and gas and many food items.

If there were changes to either supply or demand, it wouldn’t be such a problem, but it’s the combination of the two (low supply huge demand) that has led to an extraordinary inflation impulse around the world, and increasingly in Australia.

The higher costs of doing business have been passed onto customers in most cases, leaving everyday Australians materially worse off.

Australia’s Reserve Bank has responded to inflation in the same way as other central banks have around the world: by raising interest rates. This means that a higher proportion of incomes are going towards paying interest on mortgages.

Given property carry’s almost 50% of the governments income in tax collection, this sector has just as much impact on the fastest way to curb inflation. Hit the pockets of peoples shelter.

In Australia, most people are on variable rate mortgages, so they manage the inflation by tightening their belts and pulling back on discretionary spending. And as an investor to service an investment right now is hard so naturally you watch your spending.

The Reserve Bank is aiming to create a better balance between the supply and demand of goods and services, as higher interest rates will slow down the economy.

As harsh as it sounds, there’s no easy way around the short-term pain that people are feeling until the high inflation is brought down.

If people and businesses regard inflation as a fact of life, they’ll start raising prices in anticipation of cost increases. And that makes it a self-fulfilling prophecy.

Is inflation a good thing? It depends on the level of inflation. In Australia the ideal ‘goldilocks’ zone of inflation is between 2 – 3%. We are heading for 8%.