The cost of living is soaring, but higher interest rates won’t help

But it may be affected by excessive costs adjustments that don’t signify the final worth pressures on the financial system, so “for policy purposes” (that’s, for its choices about altering the official rate of interest) the Reserve focuses on a measure of “underlying” inflation known as the “trimmed mean”.


This excludes the 15 per cent of costs that rose probably the most in the course of the quarter and the 15 per cent of costs that rose the least or fell.

By this measure, costs rose by 1.4 per cent in the course of the quarter and by 3.7 per cent over the 12 months. This is the very best it’s been since 2009, and nicely above the Reserve’s 2 to three per cent goal vary.

It’s normal behaviour for incumbent politicians to say the credit score for something good that occurs within the financial system throughout their time period, no matter whether or not they’re entitled to.

So it’s solely tough justice for opposition politicians accountable the federal government for something unhealthy that occurs – which is simply what Labor’s been doing this week.

But Scott Morrison and Josh Frydenberg have been arguing furiously that the leap in most costs has had nothing to do with them. And I feel there’s plenty of reality to their declare.

Batting away criticism: Treasurer Josh Frydenberg and Australian Prime Minister Scott Morrison.

Batting away criticism: Treasurer Josh Frydenberg and Australian Prime Minister Scott Morrison.Credit:James Brickwood

Let’s take a look at the actual costs that do most to clarify the March quarter bounce in residing prices. The largest was a 5.7 per cent rise in the price of newly constructed homes and models.

This has been attributable to shortages of sure imported constructing supplies attributable to pandemic-related disruptions to produce, worsened by a surge in demand for brand spanking new houses arising from the authorities’ efforts to counter the “coronacession” by chopping rates of interest and utilizing HomeBuilder grants to maintain the constructing trade shifting.

Next in significance in explaining the surging price of residing is an 11 per cent rise in the price of petrol and diesel gasoline, attributable to Russia’s battle on Ukraine. These costs are up 35 per cent over the 12 months to March.


The greater world oil worth has additionally raised recent meals costs by growing the price of fertiliser, in addition to growing the price of transporting many items. The pandemic has quickly elevated the price of worldwide delivery.

Third in significance this quarter is a 6.3 per cent enhance in college charges attributable to a federal authorities choice final 12 months.

Add within the 12 per cent annual rise in beef and lamb costs attributable to graziers’ restocking following the top of the drought and also you see that a lot of the rise in residing prices thus far comes from elements far past the federal government’s management.

So, are Morrison and Frydenberg off the hook on rising residing prices? No. People really feel the ache of rising costs extra acutely when their wage rises haven’t been maintaining, not to mention getting forward.

In a well-managed financial system, staff’ wages rise just a little sooner than costs. This hasn’t been occurring, notably prior to now two years or so, and the federal government has made no try to rectify the issue.

Raising rates of interest can do nothing to repair all the issues we’ve famous on the supply-side of the financial system. The solely factor they will do is dampen the demand for items and companies by growing the price of borrowing and by leaving these folks with mortgages with much less disposable earnings to spend.


Which is an economist’s manner of claiming what all people is aware of: that greater rates of interest add to the residing prices of the third of households paying off a house mortgage. Those who’ve taken on loans in recent times will really feel it most.

Of course, all these folks residing off their financial savings shall be cheering the return to rising rates of interest. But from an economy-wide perspective, the winners are far outweighed by the losers.

Ross Gittins is the economics editor.

The Business Briefing publication delivers main tales, unique protection and skilled opinion. Sign as much as get it each weekday morning.

Source hyperlink

Leave a Reply

Your email address will not be published.