Inflation impacts
UQ researchers share their expertise on inflation
Inflation in Australia is officially at its highest level in more than 20 years, confirming what people have been experiencing at supermarkets, service stations and in housing markets.
Why does the jump in inflation matter and how will it impact Australians over the coming months and years?
How much will interest rates increase and how will that flow on for renters?
UQ researchers share their thoughts on inflation, cost of living and the economy ahead of the federal election.
Housing affordability is creating financial pressures for families
Professor Shaun Bond – School of Business
Construction costs on new homes and large rental increases are two of the main drivers pushing up the cost of living for Australian households. There are many different factors driving these price increases but almost all are due to the pandemic’s economic upheaval.
In the case of surging rental prices, there are no easy answers for those families struggling to find accommodation. Strong interstate and interregional migration has led to a rapid inflow of new residents, and the supply of new homes has not kept up with demand given the rapid movement of people who are no longer tethered to main employment centres. The supply of new homes has also been impacted by construction supply chain problems and a critical labour shortage. Landlords have also sold rental properties in the face of strong buyer demand, further reducing the number of rental properties.
It is expected some price pressures will moderate in coming months. Already, house price growth appears to be slowing in Sydney and Melbourne as affordability constraints limit buying activity. Expectations that the Reserve Bank will soon start increasing interest rates will further slow buying activity and take some of the heat out of the construction sector. Population growth pressures may also ease as rental shortages limit the appeal of moving and a strong job market keeps people in the major cities.
Contact: s.bond@business.uq.edu.au, +61(0)422 072 895
Image: Getty Images / Lisa Maree Williams / Stringer
Rate rises need to be handled carefully
Professor Stephen Bell – School of Political Science and International Studies
Any cycle of rate rises will need to factor in the likely impact on a high debt economy and especially on heavily indebted households.
Rate rises will need to be handled carefully. In the late 1980s the Reserve Bank of Australia miscalculated in the context of financial deregulation and amidst leveraged overheating in the commercial property sector. This led to a policy-induced recession.
Rate rises will be aimed at reducing both demand in the economy and inflationary expectations.
With low wages growth in recent years, the inflationary pressure is not just through wage pressures but also through more general demand pressures, in part due to historically low interest rates, and in part due to government stimulus packages in response to COVID.
Contact: stephen.bell@uq.edu.au, +61 (0)400 509 117
Image: Getty Images / Mark Metcalfe / Stringer
Target rate for wages growth is needed
Professor John Quiggin – School of Economics
A 5 per cent annual rate of inflation is not, in itself, a major problem. It has become evident that very low rates of inflation can be just as damaging as high inflation, by not allowing the Reserve Bank room to cut interest rates far enough when the economy is depressed. The 2–3 per cent target adopted in the 1990s made sense as a way to break the inflationary expectations built up over previous decades, but is now clearly too low. If inflation targeting is to be retained as a policy, the target should be raised to 4 per cent.
What is really needed though is a target rate of growth for wages, which have been stagnant for years and have lagged far behind prices in the recent upsurge. Wages should be increasing by 6 per cent a year, at least for the next couple of years. Achieving this will require not only caution in raising interest rates but the repeal of decades of industrial relations legislation explicitly designed to hold wage growth down.
Contact: j.quiggin@uq.edu.au, +61 (0)400 747 165.
Image: Getty Images / Rhisang Alfarid
Image: Getty Images / Rhisang Alfarid
Image: Adobe Stock / Daria Nipot
Image: Adobe Stock / Daria Nipot
Image: Adobe Stock / Rafael Ben-Ari
Image: Adobe Stock / Rafael Ben-Ari
Image: Adobe Stock / Craig
Image: Adobe Stock / Craig
Transport and housing costs increase, but there are also some decreases
Professor Paul Henman – School of Social Science
It’s worth taking a closer look at how prices inflation varies around Australia and what it means for those on low wages and government benefits.
Over the last year prices have risen 5.1 per cent, but this varies across Australia. Prices rose the most in Perth (7.6 per cent) – 50 per cent higher than the national average – followed by Brisbane (6.0 per cent). Our biggest capital cities – Sydney (4.4 per cent) and Melbourne (4.5 per cent) saw the smallest increases. This suggests price increases are impacting some areas more acutely than others.
What costs more?
Looking at different groups of expenditure:
Image: Adobe Stock / Daria Nipot
- Transport (which includes petrol) has seen the highest price increases (15.1%), with great variation between capital cities. Hobart (19.5%) has had the highest increase and Sydney (12.7%) the lowest.
- Housing (8.1%) is the area with the second highest price increases – but with wide variations – from Perth (18.1%) more than double the national average, and then Brisbane (10.2%) – and Melbourne (4.4%) and Sydney (4.5%) the lowest. No doubt these biggest cities remain the most expensive housing locations, but it’s not where prices have risen the most.
- Education is the third highest price increases (4.9%) with the biggest increases in Darwin (6.7%) and Perth the lowest (3.6%).
Image: Adobe Stock / Rafael Ben-Ari
Some things now cost less
Not everything is costing more. Consumers have benefited from lower prices in the last year:
- Clothing and footwear recorded a decline of 2.2% (with Canberra and Darwin both recording the largest declines of 2.9%, and Sydney the smallest 0.7%).
Image: Adobe Stock / Craig
- There’s also been a slight decline in communications prices, with a decline of 0.7% (largely similar across the country).
- The cost of alcohol and tobacco has increased, but only slightly (1.7%).
- Electricity prices declined for much of the country (Sydney -4.9 per cent; Melbourne -3.3 per cent; Brisbane -2.1 per cent; Adelaide -4.9 per cent; Hobart -8.1 per cent). The real price hit was in Perth with a more than doubling of prices over the last year (+116.7 per cent), but which larger reflects a return to prices from 18 months earlier (when prices massively dropped to a third in December 2020). Canberra also saw a sizable increase (+12.0 per cent) and Darwin a modest increase (+2.6 per cent).
Disadvantaged households will be hardest hit
Aside from the increases, it’s important to look at which of these expenditure areas make up the household budget, including those that are non-discretionary (like housing, transport and food), compared to more discretionary items (eg alcohol and tobacco, and leisure). This is particularly important for low-income households (on low wages and/or government benefits).’
Contact: p.henman@uq.edu.au, +61 (0)402 734 218
Making investment decisions
Dr Min Zhu – School of Business
The question of why inflation has increased and whether it will stay high is subject to debate. Some believe the recent surge in inflation is a precursor to a long time period of high inflation, while others believe it is another casualty of COVID and will dissipate over time.
People’s beliefs will play a key role in your asset decisions. If Australians expect high inflation in a foreseeable future, they should be shifting holdings away from financial to real assets. People should also tilt equity portfolios towards small cap stocks and profitable companies with more pricing power and reduce holdings on tech and unprofitable companies. If, on the other hand, people believe that high inflation is only transient and the market is overly worried, maybe now is a bargain time to buy stocks, especially larger cap and high growth stocks.
Contact: m.zhu@business.uq.edu.au, +61 (0)432 027 814
Image: Adobe Stock / ipopba
Media: communications@uq.edu.au; +61 (0)429 056 139.
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