Australia's Post-COVID Inflation in a Nutshell

An exciting and important contemporary problem in 2024 is inflation. Let us have a look at how inflation has panned out in the past 2-4 years!

Beginner's Guide: The inflation rate measures the rate at which general level of prices increases over a given period of time, generally a quarter (3 months) or a year.

Imagine you go to the store and notice that the price of bread increases from $3 to $4, and every other item in the shops have followed this trend. This increase in the price of goods and services represents inflation.

Why is it important though? Inflation erodes the value of money and your purchasing power. That’s why the house that once costed merely $200 000 is now worth $1 000 000, and also why we have changed from having a mere minimum wage of $36.37 per week in 1966 to $882.80 per week in 2023.

What must be fresh in our memories is the unique landscape shaped by COVID-19. With lockdowns and border closures in 2020, Australians were restricted in their ability to spend money, leading to a significant increase in savings. With limited opportunities to shop or travel, Australians found themselves accumulating more savings than usual, reaching a peak of 24.0% in June 2020. However, as lockdowns eased and borders reopened, the large national savings drove up prices as businesses struggled to keep up with the sharp increase in consumer spending.

INSIGHT: This is demand-pull inflation – consumers want too much, but businesses cannot supply any more of it. It’s like a concert ticket selling out fast – they can’t manufacture new seats, so they keep pushing prices up to see who is willing to buy it. This helps them increase profitability but creates a hole in a household’s pocket!

Simultaneously, the Reserve Bank of Australia (RBA) reduced their cash rates to 0.10% (which in turn, cause a reduction in commercial interest rates) in what is known as a ‘contractionary monetary stance’ to support households and businesses at a time when over 870 000 people lost their jobs. Reduced interest rates meant people with loans needed pay less in mortgage or loan repayments, but also then divert that money to purchasing important household items. This relieved pressure off households and encouraged borrowing and spending to recover the economy from recessionary pressures. Consequently, the property market experienced a boom as more people took advantage of cheaper loans to purchase homes.

The combination of increased consumer spending and a booming property market fueled Australia's inflationary pressures across the economy. Australia's inflation soared to alarming levels, peaking at 7.8% in December 2022. This rapid rise in inflation created a cost-of-living crisis, significantly impacting households' purchasing power and ability to afford essential goods and services.

To combat the escalating inflation, the RBA responded by engaging in ‘expansionary monetary policy’ by increasing the cash rate to 4.35%, thus increasing commercial interest rates. Higher interest rates make borrowing more expensive, reducing consumer demand and dampening inflationary pressures. However, while these measures are designed to stabilize prices, they can also exacerbate the cost-of-living crisis by increasing the cost of borrowing for households and businesses.

Despite initial challenges, recent reports from the Australian Bureau of Statistics indicate a positive development. Inflation has moderated to 4.1% in December 2023, moving closer to the RBA's target band of 2-3%. This suggests that the measures taken by the RBA are beginning to have the desired effect of controlling inflationary pressures. The moderation in Australia's inflation is welcome news for the economy as it indicates a gradual easing of the cost-of-living crisis and a more stable economic environment.

However, there are more complex problems arising with the slowing down of inflation. Stay in contact and read more upcoming articles to remain up to date about each complex problem. They’re all relevant, and each problem impacts you in ways you may not even know yet!