Do you have a mortgage? You may be facing significant challenges in the ongoing battle against the rising cost of living.

While the official inflation rate stands at 4.1%, individuals with both employment and a home loan experience a considerably higher real inflation rate. Working families engaged in paying off a mortgage are grappling with an inflation rate nearly 70 % above the officially reported consumer price index.

This discrepancy in inflation rates becomes more evident when comparing the experiences of various segments of the community. Notably, those with mortgages are bearing the brunt of surging inflation, while self-funded retirees manage to navigate through the challenges posed by escalating prices and high-interest rates.

A detailed analysis of the financial pressures on different demographic groups reveals that working families with home loans face an inflation rate almost 70 % higher than the officially documented consumer price index. The Reserve Bank's aggressive interest rate hikes are further exacerbating this inflationary impact.

The consumer price index, which monitors prices across major cities, indicates a 4.1 % inflation rate for the 12 months ending in December— a decrease from the previous year's 7.8 %. However, this broad measure fails to account for the distinct spending patterns of different groups within the community, particularly working families who are more likely to have mortgages. Mortgage rates, omitted from the consumer price index since the 1990s, contribute to the substantial variance between the official inflation measure and the actual experiences of individuals.

Data released by the Australian Bureau of Statistics reveals that the effective inflation rate for workers with mortgages is at 6.9 %, a decrease from the 9 % recorded in the previous quarter but still notably higher than other demographic groups. This surge is primarily attributed to the Reserve Bank, which, in its bid to curb inflation, raised official interest rates to an 11-year high of 4.35 % in November, impacting one-third of the population with mortgages. Since December 2020, the cost of mortgage interest for working families has surged by 109 %.

In contrast, the inflation rate for self-funded retirees, who typically have fewer mortgages, has slowed to 4 %—lower than the consumer price index. Age pensioners and welfare recipients also face challenges, with inflation rates at 4.4 % and 5.2 %, respectively.

A common concern for all groups is the rising cost of insurance, which has seen premiums for car, house, and home contents insurance increase by approximately 30 % since the end of 2020. This surge is attributed to global reinsurance costs and the impact of natural disasters.

Reserve Bank governor Michele Bullock acknowledged in a recent press conference that the bank's higher interest rates struggle to influence certain goods and services, such as insurance. She highlighted the challenges posed by insurance costs related to climate change, reinsurance costs, and profit-margin rebuilding, stating that monetary policy is limited in addressing these issues.

While overall prices continue to rise, there are areas where certain segments of the community find relief. Clothing and footwear prices have dropped by 1 % for working families over the past year, with age pensioners experiencing a more pronounced decline of 1.5 %. Additionally, higher interest rates have dampened demand for furniture, carpets, and household goods, resulting in a 0.8 % drop in prices for working families in the final quarter of 2023— marking the second consecutive decrease. Transport and education prices also saw declines in the December quarter.

This analysis is based on an article by Shane Wright of The Age. (Posted February 7, 2024, at 03:44 pm)

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