Things have gotten more expensive. You notice that every day, everywhere. Let’s quickly recap why prices have been rising in Australia.
Obviously, the pandemic drove up the cost of almost everything. Supply chains were put under a lot of stress during COVID as more people ordered more stuff online.
However, factories didn’t produce as much because their workers were locked down or isolating. Ports couldn’t operate as usual either. These initial delays eventually snowballed into queues of ships in front of harbours.
Each of these ships had thousands of containers with thousands of products and parts that some businesses were expecting and had planned for.
These missing products slowed production down further and increased scarcity in the market. Less stuff was available for consumers to purchase.
A supply chain that is smaller and more uncertain in nature is becoming more costly to maintain. Freight costs go up.
Shipping costs before the pandemic were at $1300 per container, increased seven-fold by late 2021 ($11,000) and have now softened a bit ($6000), according to the Global Container Freight Index.
Any business importing stuff has higher costs and passes these onto us consumers by charging higher prices or fees – just ask anyone in the construction industry. Shipping costs will likely soften further but remain well above pre-pandemic levels.
Conflict, climate and cost
The war in Ukraine made things even worse. As two of the world’s largest wheat exporters are tied up in a war, less wheat is available on global markets.
Financially, the war in Ukraine even benefits some segments of the Australian economy. Our farmers receive more money for their wheat exports. Higher export incomes – this included super-high commodity prices for a while – flooded more foreign money into our economy.
The federal government generously introduced income support programs, injecting more money into households. Of course, interest rates were very low at the start of the pandemic too.
And let’s not forget about untimely floods. In NSW and Queensland flood events ensured lower harvests and made it more difficult for the remaining produce to reach markets.
All the while there is a skills shortage in the country. Now workers can demand higher wages. That leads some people to argue that rising wages were driving inflation. The Australia Institute argues otherwise and found in a recent report that it was rising company profits, rather than rising costs that was driving inflation in Australia.
So much economic data to track and make sense of. We can conclude that everything has gotten more expensive, and we need to find ways to deal with that.
Who suffers most?
Who suffers most from the rising prices and cost of living? Data from the Australian Bureau of Statistics suggests retiree households were much harder hit than employee households. That makes perfect sense. When your income is fixed, wage inflation can’t help you to soften the blow of rising costs. Also, the lower your income the less wage inflation helps.
A 10 per cent increase on a low income is much less helpful in battling high utility costs than a ten per cent increase of a high income.
Everything gets more expensive, old people and poor people are hit hardest. You probably expected that much.
Let’s have a quick look at household spending to see how we’ve reacted to rising cost.
The data differentiates between discretionary and non-discretionary spending. These are two unnecessarily complicated technical terms. Think of discretionary spending as ‘nice-to-haves’ or non-essentials (travel, beer, sport, coffee, entertainment) and of non-discretionary spending as ‘must-haves’ or essentials (rent, mortgage, groceries, utilities).
When the pandemic first hit, we just stopped spending. We didn’t commute to work, we stayed in and made do with what we had.
Lots of fun opportunities to spend money were not available and discretionary spending plummeted. We did however spend some money online, purchased webcams and puzzles, and other relatively small things to keep us entertained and somewhat productive.
After the initial COVID shock, we started spending again. The annual peak in ‘nice-to-have’ Christmas spending was even bigger in 2020 and 2021 than in 2019.
Overall, our spending trended upwards. Our non-discretionary spending (that’s the essentials) grew at a lower pace than our discretionary spending. The increased discretionary spending was at least somewhat easier to stomach because household savings went up during the pandemic for quite a while. Now we are slowly (or not so slowly) burning through our reserves.
The solution
What can businesses and households alike do to get through this period of rising cost of living?
I very much understand the tendency to put your head in the sand and hope that the phase of rising costs will come to an end soon. I fear this day is not coming anytime soon.
The Reserve Bank has been raising the interest rate to slow inflation without sending the economy into a recession tailspin. This is a delicate balancing act.
In the meantime, I suggest businesses and households alike don’t stop spending but invest into high-quality goods, machinery, and equipment. I am sure that many businesses will find it difficult to overcome the inertia and keep investing in times of rising costs.
Ultimately, high quality investments will lengthen the replacement or renovation cycles. Investing in long-lasting (but more expensive products) will keep the economy ticking along and will be good for the environment.
