Inflation is growing at its fastest pace in 20 years. Is it making you behave differently?

Inflation is growing at its fastest pace in 20 years.

The value of a typical worker’s pay packet has been deteriorating since mid-2021.

How much should we be worrying? Will things get even worse?

It’s a conundrum for the Reserve Bank, but it wants you to feel like it’s got things under control.

Caught off guard

The recent surge in consumer inflation has caught the RBA by surprise.

We haven’t seen inflation like this in the modern era.

Underlying inflation — which removes volatile price movements from the data to see the truer rate of inflation underneath — grew by 1.4 per cent in the March quarter.

It was the fastest quarterly growth in prices since the RBA began targeting inflation in 1993.

See the graph below.

The range of goods experiencing notable price increases has also increased in recent months.

In the March quarter, around 70 per cent of the goods in the consumer price index (CPI) “basket” had an annualized inflation rate above 2.5 per cent.

We haven’t seen generalized price increases like that since before the global financial crisis.

See below.

Range of goods in CPI basket

So, not only are prices rising, but the price increases are spreading through the economy.

Here’s where things currently stand (at the end of March):

  • Fuel prices have jumped by 35 per cent in the past 12 months, which is the largest annual increase since 1990
  • Building materials prices are 15.4 per cent higher than a year ago
  • Consumer sustainable inflation is rising at its fastest pace in more than three decades (this category includes motor vehicles, household furniture and goods, and computers and televisions, among other things)
  • Grocery prices (excluding fruit and vegetables) rose 2.8 per cent in the quarter, which is the strongest quarterly increase since 1983
  • fruit and vegetables prices are 6.75 per cent higher than a year ago
  • Rents pink by 0.6 per cent in the March quarter, which is the strongest quarterly increase since the September quarter of 2014
  • Tertiary education prices increased by more than 5 per cent in the March quarter, driven by the federal government’s decision to increase the cost of some university courses

Has your weekly wage increased at similar rates?

I doubt it.

The real value of your wage (adjusted for inflation) has likely been deteriorating.

In fact, the RBA says real wages have been declining in Australia since mid-2021, and it’s hurting poorer households the most.

“Cost-of-living pressures from rising food and fuel costs are likely to fall unevenly across households, as lower-income households spend a greater proportion of their income on food and fuel and have relatively limited buffers of savings to draw upon,” the RBA said last week.

Which brings us to its decision to lift interest rates.

So, where to from here?

Last week, the RBA lifted the cash rate target from 0.1 per cent to 0.35 per cent.

It said it partly did so because interest rates couldn’t stay at these emergency low levels forever. Rates have to start returning to more “normal” levels.

But it also lifted the cash rate target because it is concerned about people’s expectations.


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