These are the simple, brutal numbers that explain why households are doing it tough right now

by Admin
August 4, 2024

There won’t be protest marches in the streets when the Reserve Bank of Australia makes its next decision on interest rates.

But that’s only because everyone who would join the throng will be busy working.

Many of them will be trying to get it all done before school pick-up, or perhaps before the childcare centre starts charging $20 a minute for every 60 seconds you’re not there to nab your kid by 6pm.

It feels as if there’s a generational split in our society and the economy at the moment. And, after the RBA’s announcement on Tuesday, it’s likely to get uglier.

To be clear, the market consensus — the collective view of the big brains that crunch the data and bet on it for a living — is that interest rates will stay on hold.

In the lead-up to Wednesday’s inflation reading for the June quarter, there was speculation that if it came in hot, above 4 per cent, a rate rise would be on the cards.

In the end, the “headline” annual rate of inflation was at 3.8 per cent, up from 3.6 per cent at the last time we looked, though still lower than what some economists had feared.

However, the “trimmed mean” measure of inflation, which kicks out volatile items and is the data the RBA focuses on, fell slightly in the June quarter.

In fact, it has been falling consistently for a year and a half.

So there likely won’t be a 14th hike in the central bank’s cash rate, which is the rate used for overnight “settling” of swaps between the big banks.

It’s more well known as a marker that lifts or cuts the variable rates millions pay in mortgages.

But keeping rates where they are remains an immense burden. Here’s why.

Renters are in an unenviable position

About one-third of Australians own their homes (we’ll get to them soon).

Another one-third are paying off a mortgage, with repayments rocketing since the Reserve Bank started an aggressive hiking cycle in May 2022.

Under the most pressure have been borrowers with newer loans because the interest rate is being applied to a larger amount since they haven’t had time to pay down what they owe to the bank.

The final group, an estimated 8 million Australians, are renting. And while these households are not shackled with a mortgage, some of the owners of the dwellings they live in are.

Renters are probably in the worst position, given this year, on average, rents have gone up more than 10 per cent. In some capitals that number is closer to 20 per cent in 12 months.

Even though those struggling under a home loan are massively stretched, there is one comfort.

If the repayments get beyond them, at least the value of the dwelling they’re paying off will have risen, and it keeps rising.

Inflation is rising but wages aren’t keeping pace

Here are the simple, brutal numbers behind why people are hurting.

In May 2022, the RBA started hiking rates to try to get inflation under control.

In the nine quarters since then, the consumer price index (CPI) has been rising at an average of 5.6 per cent, hitting a peak of 7.8 per cent.

But while the price of the things you need to live has increased, wages haven’t kept up.

Headline inflation increased from 3.6 per cent in the March quarter to 3.8 per cent in the June quarter.(Kinga Krzeminska)

Prices have risen far faster than incomes, which means people are going backwards.

In the time since that first hike, the average annual wage increase inked in big employment agreements brokered by unions has been 4.6 per cent.

The figures are submitted by the parties to the Fair Work Commission so it’s not a “stick your finger in the wind” vibe. This is the actual figure.

(For the purposes of disclosure I am a member of MEAA media union and, on behalf of ABC staff, was part of a team that helped negotiate the last two enterprise agreements with management).

In agreements not submitted by a union, the wage increase is 3.6 per cent, which syncs with another key bit of data, the wage price index (WPI).

The general (overall) WPI in that time is also 3.6 per cent, although it has been ticking higher, with the last three quarterly figures at 4 per cent or above.

So wages are up by 3.6 per cent, likely more if you are under a big union agreement. But the increase in inflation is up 5.6 per cent.

And here’s the kicker — a substantial fact — mortgage repayments are not included in the CPI.

So what’s trumpeted as a rise in the cost of living does not include the biggest cost for a large proportion of the community, their rocketing monthly home loan repayments.

The generational divide at the heart of the inflation fight

People who have paid off their housing tend to be older.

This doesn’t mean all Baby Boomers are rich, but on average they are wealthier than people who haven’t had the same amount of time to amass assets.

The Reserve Bank has been lifting interest rates to take money out of the economy, effectively trying to turn the temperature down.

In their recent statement, ABS officials said rental price growth continued to reflect low vacancy rates and a tight rental market.(ABC News: Liz Pickering)

However, this move has had the opposite effect for many older people because it has lifted the value of assets.

Got money in the bank as a deposit? The rate has gone up.

Got superannuation that you can draw from? It’s getting (in some cases) double-digit annual returns.

Got investment properties? Strong growth.

So not all boomers are benefiting, but the overwhelming burden of reducing inflation for the entire community is being worn by people who are younger and earning less money.

Essentially, those who earn an income from working, not from assets, are copping it. And they’re unwilling conscripts in the fight to get inflation down.

RBA’s focus on cutting inflation disturbing some observers

The Reserve Bank has been consistent with its messaging when talking about how it must lower inflation (former governor Philip Lowe called it “a scourge” and “evil”) and how it only has interest rates as a lever to do that.

The federal government has introduced small measures such as energy bill rebates to help reduce people’s cost of living without boosting inflation.

There are a lot more things it could do, such as temporarily lifting superannuation or the Medicare levy, but everything is difficult and politically explosive.

But the RBA’s laser focus on getting inflation down to its target range, between 2-3 per cent, has been disturbing some observers for a couple of reasons.

First, because it will likely cause a rise in unemployment, which means people will lose their jobs.

It also ignores or downplays a lot of things.

Like the long period where inflation was under the target, where it watched stagnant wage growth while cutting interest rates, a measure which helped pump up property prices.

Or the impact those decisions had on keeping unemployment higher than it needed to be, throwing swathes of the community into poverty because our unemployment benefits are low by world standards.

Those people, again, are younger.

What does this mean for Australians?

High inflation is bad because it reduces people’s purchasing power, which is what they can get with their money.

But the fight to get it down is largely being borne by younger — sub-65-year-old — people because they are more likely to be earning income from work, forming families and raising children.

They don’t have the headspace or the time to organise protest marches, write to the Reserve Bank, call talkback radio, form lobby groups or pressure their members of parliament about the issue.

They are just trying to get through the week and wondering how to make their next payment.

Actually, add a few more things to that to-do list.

Compulsory voting means they have got to turn up at the ballot box in several states and territories this year.

And then again at the federal election next year.

So there is a chance they will organise that protest after all.