Global prices and interest rates are on the move.
American consumer price inflation has hit 7.5 per cent, the highest in 40 years, and the US central bank has made its first rate hike in years.
In Australia, inflation is officially 3.5 per cent, but as we explained in part one of a 7.30 economic special, everybody's inflation is different — the prices of many everyday items that we buy are rising much faster, especially petrol, and this new era of higher inflation has only just begun.
Economists expect the Reserve Bank to announce its first lift in official interest rates in more than 11 years by June at the latest, and financial markets are betting the cash rate will reach 2.5 per cent.
But wages growth remains sluggish, which means most workers are falling behind.
It's especially tough in Western Australia.
"I haven't been able to continue to keep up with the cost of living regardless of working full-time," Julie-Marie Hay told 7.30.
An enrolled nurse and single mum in Western Australia, Ms Hay said she has been having trouble making ends meet for some time.
"I work weekends as well and it still doesn't cover everything I need," she said.
Ms Hay has not seen her pay rise in real terms (that is, after inflation) for four years due to a historic public sector wage freeze in WA, and she's not alone.
"My expenses here in this house have actually gone up about $300 a fortnight over the last 12 to 18 months," she said.
"I haven't actually bought my children's school clothes this year at all. Somehow I have to be able to afford to buy them an entire new winter wardrobe.
"My biggest worry really is just not being able to afford to continue paying rent, and not being able to afford to continue paying my bills.
"I'm terrified of what's going to happen."
In WA last year, inflation ran at 5.7 per cent while wages only grew at 2 per cent. This was despite low unemployment, which usually would push wages up.
The WA state government is now set to introduce a 2.5 per cent per year pay increase, with either a $1,000 one-off payment or an additional 0.25 per cent, which it says will provide CPI wage rises to more than 150,000 public sector employees.
But the United Workers Union says this will equate to less than $40 a week before tax over two years for the vast majority of their members.
Cost of inflation
Across Australia, inflation was 3.5 per cent last year, while wages increased by only 2.1 per cent (average weekly wage). Price inflation without income inflation means most people fall behind.
Angela Jackson, head economist at Impact Economics, said the rise in inflation was partly due to the growing global demand for goods as the world comes out of pandemic restrictions.
"When demand outstrips supply, issues start to emerge," she said.
It also depends on what you buy. Vegetables increased by 6.1 per cent, and beef and veal increased by 8.1 per cent. Petrol has gone up 32.3 per cent.
SPC chief executive Robert Giles said the rising costs of tin, wheat and fuel had prompted the company to increase the prices of some of its products.
"It's a last resort that we push our prices up to our consumers," Mr Giles told 7.30.
"But on baked beans and spaghetti, canned tomatoes and canned fruit, we expect prices of over 10 per cent on shelf to be going up unfortunately, in about 12 weeks' time."
Pressure to increase prices
After 315 days affected by pandemic restrictions, Kiff Saunders is trying to get his hot-air ballooning business back on track in a turbulent economy.
"Fuel's now nearly two bucks a litre. I mean, of course, this is going to have a massive impact [on the] price of gas, price of insurance. Costs are going up.
"And obviously, when prices go up, profit is going to go down, and there's only one avenue to be able to resolve that.
"In a really volatile consumer market, you know, it's very tricky to take that brave step to be raising your prices.
"We still haven't had a great chance to be able to determine what that price point is to meet the rising costs that we're currently experiencing, given the current economic situation.
"At this stage, we have a far bigger objective, which is just survival."
Like many small business owners, Mr Saunders wants to raise wages, but the timing is tricky.
"I owe these people a lot in the sense of what they have given to this company, and to me, and they're friends," he said.
"The cost of living is going up, and they deserve it. But obviously, running a business, it still comes down to the fact that people accept that you're going to have to pass this on, because you know, you can't absorb all of these costs.
"I've completely accepted that if this business breaks even over the next year, then that's actually a great result."
How high will inflation go?
Wages are finally starting to rise, but not fast enough yet.
Economist Angela Jackson says bosses have simply got out of the habit of giving wage rises.
"You also have industrial relations umpires that are fixated on [the idea that] inflation is what wages should be, rather than thinking about inflation plus productivity growth, which should be the basic economic formula for sustainable wages growth … so that workers are getting their share of a growing economy," she said.
"In terms of inequality and who's going to be impacted by rising inflation, it is going to be low-income households and it's going to be households on fixed incomes."
Ms Jackson said there is a larger, structural issue to blame for the slow growth in wages.
"We had 10 years of really low wages growth despite strong economic growth. And we're seeing now, coming out of the pandemic, those wages just aren't coming back [with] the sort of the strength that we would expect," she said.
"It's the million-dollar question as to why [wages aren't rising]. There's been a lot of papers written on this, the Reserve Bank has held symposiums.
"There's clearly a structural issue with our labour market, which means that wages just simply aren't flowing through. There are a lot of reasons for that — public-sector wage policies, which are suppressing wages, we also have a wage-setting mechanism that is relatively slow."
So, how high should we expect inflation to go?
"It depends a lot on how long the crisis in Ukraine lasts, because petrol prices are going to be a big part of that story," Ms Jackson said.
"But I think we should brace ourselves and expect to say, certainly, inflation [of] about 5 per cent and probably edging up to 6.
"Will it go as high as we expect to see, for example, in the US, where now they're forecasting over 10 per cent? Probably not."
Alan Kohler is the ABC's finance presenter. He also writes columns for The New Daily, which is financially backed by industry super funds, and he's also editor-in-chief for the Eureka Report, owned by Investsmart.
Watch part one of Alan Kohler's 7.30 special on the cost of living on ABC iview. Watch part two on ABC TV tonight.
