There is an old saying that central banks will raise interest rates in their fight against inflation “until something breaks”.
This could mean higher unemployment, lower asset prices or a general economic slowdown. Of course, lower inflation would also prevent further interest rate hikes.
The latest data from the United States has given us a first indication, in recent months, that the US Federal Reserve could achieve its objective of controlling inflation. The consumer price index rose 0.4% last month and 7.7% from a year ago, two levels below estimates and below the peak inflation reached so far .
But the Fed has probably already “broken” something – the economy. It is generally accepted that the world’s largest economy is in or approaching a recession.
Cracks also appear here
As for Australia, after seven consecutive Reserve Bank interest rate hikes that have added hundreds of additional dollars per month to typical mortgage repayments, the economic and social cracks are beginning to show.
The damage from the second most aggressive round of interest rate tightening in Australia’s history goes beyond financial markets. The extent of the economic damage depends on how far the Reserve Bank is willing to raise its exchange rate.
The main problem remains “too high” inflation, according to the Reserve Bank. The main contributors to inflation are oil, energy and food prices. The CPI is currently at 7.3% and is expected to peak at around 8% by the end of the year.
So what could push inflation even higher?
Higher food prices could be in store as the floods take a large amount of fruit and vegetables out of supply. Gas and electricity prices could also rise. But rental prices have caught the eye this week.
The latest ABS data shows that rental prices are increasing by 1-5% per year.
The Reserve Bank weighed in on the discussion this week with a sobering warning. He warned that rents were rising and were expected to continue rising until next year, which would cause some stress for low-income families.
“So higher rents could push some tenants into financial hardship, especially when combined with broader cost-of-living pressures,” RBA Deputy Governor Michele Bullock said during the interview. of a business meeting.
Economist Angela Jackson says that’s concerning.
“Rent is a big chunk of your income and so if it goes up significantly it really bites, you know it’s not like your coffee goes up 5 per cent.”
About a third of households are renters and many have relatively low incomes.
Jackson says that could leave millions of Australians struggling for months to come.
Make ends meet: increase your income or reduce your expenses
The problem for households is that their budgets are increasingly under pressure: income is not increasing as fast as expenditure. To solve this problem, households must either increase their income or reduce their expenditure.
There is evidence that Australians are now starting to cut spending.
NAB data shows consumer spending fell 0.3% in October, ending a nine-month streak of spending increases.
Another option for tenants is to try to find additional income. According to the Bureau of Statistics, the number of people working multiple jobs increased by 37,100 or 4.3% in the three months to June. Almost 900,000 Australians of working age now have more than one job.
“Now what we’re seeing is that rather than those people in the economy who want to work full-time being able to get that one permanent, secure job, they have to piece together multiple casual jobs,” Jackson says. “Times can change and they might not have the security they might have had in the past.”
Less money for other things
But what really, practically, happens when you can’t balance your household budget, especially when you’re renting?
“What that means is either they have to pay [rent] and obviously that means they have less money for other things – so it’s less money for food, it’s less money for health care, it’s less money for education,” says Dr. Jackson.
A Melbourne woman made headlines last week after asking a grocery store worker if a tub of yoghurt would last until Christmas. She wanted this as a treat for her kids on the special day.
But what about those Australians who find themselves choosing between buying life-saving drugs and paying the rent?
Resident doctor and former journalist Amy Coopers told The Drum that patients are now showing up at hospitals after going too long without their medication.
“Certainly we are already seeing cost of living pressures in our emergency departments,” she says. “Some people show up and are sick because they couldn’t afford their medication, which I certainly thought you wouldn’t see in this country.”
As the economy slows, unemployment will rise
The extent of the financial pain felt in the economy depends on how far the Reserve Bank will have to raise interest rates as it attempts to reduce demand in the economy.
This, he hopes, will slow inflation and reduce the cost of living. But Angela Jackson says it will also cause many Australians financial stress along the way.
“The sad reality of the numbers we’re seeing is that the economy is going to slow down significantly,” she says. “And that’s going to mean unemployment will rise significantly across the economy. Another 150,000 Australians will be out of work over the next 12 to 18 months and it will look like a recession, whether officially or not.” , said Dr. Jackson. said.
There’s a reason the Reserve Bank describes its interest rate policy path as “tight” – there’s potential for financial, economic and social harm as it tries to bring inflation down.
It is hard to escape the reality however that it is the most vulnerable in our community who pay the most for this.