Over the twelve months to the December 2021 quarter, Consumer Price Index also rose 3.5%.

The increase in inflation reflects a combination of factors. A tight labour market, spurred on by low interest rates and record amounts of government spending, has boosted household demand for goods and services. The prices of goods have increased strongly as retailers pass through the costs associated with supply chain disruptions and higher shipping prices.

While inflation was 3.5% last year, wages only increased by 2.1%. Inflation, without wage increases, means most people are falling behind in real terms.

The good news is that a wage increase may be on the way with increasing pressure being applied to various governments and private enterprise to lift wages to attract and retain quality employees. These negotiations are important to decrease the loss of people who may be looking for a career change or study instead. This also highlights the importance of non-wage employee benefits for staff retention and wellbeing.

The prices of many everyday items are rising much faster than normal. Vegetables have increased by 6.1%, and beef and veal increased by 8.1%.

Most people don’t understand what inflation is, or even realise it is there, until they walk into the shops and get a shock with how much higher prices are for everyday items. The weekly shopping bill may be managed by just choosing alternative lower cost items however even these items are experiencing higher prices.

Lower cost supermarkets, such as ALDI, have already started to benefit from consumer behavioural changes where they are seeking to balance the weekly budget, as their market share has increased in the current market.

The biggest shock price rise has been petrol, which has gone up 32.3%. This is an essential item, so people have a choice to either travel less, buy less petrol and hope that prices fall; or fill up and pay the extra cost, which many need to do with essential car travel for work.

With prices increasing at their fastest rate in a decade, concerns about the cost of living will feature prominently in the upcoming federal election campaign. The budget has made provision to assist, but this will only provide temporary relief.

The most significant price rises were for new dwelling purchase by owner-occupiers at 4.2%. The cost of building a new house is increasing at its fastest rate in more than a decade due to a boom in construction activity and record inflation in building material prices. Renters are also getting hit by an increase in rental costs.

All of this means that people need to save harder for longer to afford property. The knock on affect is that they then have less disposable income. There may also be negative psychological effects, particularly for first home owners, who are already questioning the value in owning property.

The Reserve Bank of Australia (RBA) doesn’t expect inflation to fall to a manageable range until the middle of 2023. Economists expect the RBA to announce its first lift in official interest rates in more than 11 years by June 2022 at the latest.

The certainty is that interest rates must rise to combat inflation. This will be likely to happen after the election, most probably with a gradual rises over 18 months. Excessive increases would not be welcome by home buyers and whose ownership aspirations are required to remain strong to provide economic stimulus. It is expected that the election outcome will impact how fast and hard interest rates rise depending on how the elected government manages fiscal and monetary policy.

To combat inflation, some suggestions may include:

  1. Change your spending habits – choosing lower cost shopping items, camping instead of staying in expensive hotels has become more popular and eating at home instead of at restaurants
  2. Earn more money- take a second part-time of casual job to supplement income given the high demand for labour currently, or rent out a room for income
  3. Borrow more money- get a loan or credit card to supplement your current lifestyle or using buy now pay later services.

Of course, the last can come at a major risk as it will increase consumer debt, which generally has higher interest rates than home loans.

Higher inflation driving higher interest rates will also likely see home borrowers paying less off their loans compared to when over the past few years they have become quite used to lower interest rates and being able to pay off their homes quicker. This will all come to an end once interest rates rise, as they won’t have the ability to reduce their debt at the same pace.