The latest cost of living figures show just how damaging another rate rise next week would be to households and the economy.
In the past week the likelihood of the Reserve Bank raising the cash rate to 4.35% has gone from about 20% prior to last week’s inflation figures coming out, to now an even-money bet.
I can understand this. First you must bear in mind that it is all based on speculation. Essentially those trading on the futures markets and the bond markets are betting that the higher-than-expected inflation figures out last week made it more likely that the RBA will raise interest rates.
No one really knows if they will raise rates, but if you were worried about losing your job based on a bad trade, you would see the 1.2% CPI growth in the September quarter and you would decide digging deeper into what drove that inflation is best left to Guardian Australia columnists and instead you would follow the herd.
Most of the predictions of a rate rise are based on the 1.2% growth being larger than expected. That 1.2% over four quarters would still deliver annual inflation of 4.8%, which is actually lower than it is now, seems to have been largely forgotten, except by a few like the New Daily’s Michael Pascoe who bothered to do the maths.
And of course if you were running the RBA you would also want to consider what type of things were driving inflation in the September quarter:
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Out of the 14 biggest contributors to inflation, 10 were non-discretionary items.
At this point we should note the comments of the secretary of the Treasury, Steven Kennedy, last week in Senate estimates. He was asked about the pathway to a “soft landing” – ie where inflation falls without us going into a recession.
He noted that chances of a soft landing were made harder by recent rises in oil prices because “on the one hand, it will increase headline inflation by raising petrol prices. On the other hand, it may well reduce growth and see other prices fall because people have less to spend. At least in the short term, expenditure on petrol is not very discretionary.”
When the prices of things you can’t avoid paying for rise faster than others, then that obviously reduces your ability to spend elsewhere. In this way petrol, electricity and rental price rises have the same impact as do interest rate rises.
But mortgage repayments are not included in the CPI figures. They are, however, counted in the cost of living figures that were released yesterday.
The latest figures showed that for employee households, the cost of living in the September quarter rose not 1.2% as did the CPI, but by 2.0%, and by a whopping 9.0% over the past year:
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The reason employee households saw their cost of living rise so much is because they are the more likely to have a mortgage.
The Bureau of Statistics calculates that on average employee households spend 6.2% of their weekly expenditure on their mortgage (remember this average includes employee households who have no mortgage).
By contrast, households whose main income is government transfers (not including the age pension) spend just 2.3% of their weekly expenditure on mortgages, and retirees of course are much less likely to have a mortgage:
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Employee households’ cost of living rises faster than CPI when interest rates are going up, and less when they are falling:
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Right now mortgages are going up at a great speed and when we look at some of the price rises of non-discretionary items, it is clear that households are being put under pretty severe pressure:
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It’s also why I was surprised to see commentators suggesting that the latest retail figures released on Monday made a rate rise more likely.
In September, Australians spent 0.9% more in the shops than they did in August. This was mostly due to the new iPhone and climate change. The warmer-than-usual spring meant people spent more on gardening and hardware and clothing than they usually do in September.
The 0.9% monthly increase was (as with the CPI figures) above expectations, but the annual growth was a rather paltry 2%:
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And when inflation is rising at 5.4%, retail spending growth of just 2% suggests we actually bought less stuff than we did a year ago.
The most recent figures of the volume of retail spending will come out tomorrow, but we know that the volume has been falling, and is now back to pre-pandemic trend levels:
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This of course is what you would expect – when the cost of non-retail items such as petrol, mortgages, rents, electricity, property rates, medical services and insurance are rising, you are going to buy less in the shops.
Since March last year the cost of mortgages has gone up 114%. Does the Reserve Bank think households haven’t really noticed that?
Even you if discount the record low rates during the pandemic, the cost of mortgages is now about 70% higher than it was at the end of 2019. Since then, wages have risen only about 10.5%.
Another rate rise is not going to do anything other than add to the cost of necessities. It would not so much reduce inflation as increase the cost of living and hit households whose wages and incomes continue to be worth less than they were a year ago.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
