High Inflation & Rising Interest Rates: Their Impact On Your Credit Rating ...

If you are reading this article on high inflation and rising interest rates: Their impact on your credit rating, then, like me, you have survived the pandemic only to be assailed economically. The price of all that government assistance through the Covid pandemic, is, it seems to be paid for by us via a steeply increased cost of living. The financial assistance in JobKeeper and the like pumped around $200 billion into the Australian economy and this is a major contributor to the inflation we are now experiencing. The price of credit is also going up in leaps and bounds with interest rate rises happening much more often.

“There is a price for everything in life. Even what you receive freely has already been paid for by someone.” - Sunday Adelaja

If you are a property owner with a home loan your monthly interest rates are climbing like the mercury on a hot day in January. If you are a renter your rent has jumped to unmanageable levels in response to the economic pressures on your landlord. Price increases get handed on down the food chain. The price of food, especially fresh fruit and vegetables is seriously challenging to the budgets of many medium and low income earning households in Australia. Gas and electricity bills are soaring due to international market pressures for energy and a domestic energy sector in transition after years of avoidance and neglect by the previous federal government. The price of essentials is going up on multiple fronts everywhere you look. Wages have been stagnating in Australia for decades and are now falling way behind the cost of living increases. Why is this perfect storm of inflationary pressures happening now?

What Are the Causes of this Inflation?

Firstly, how do we know about this rising inflation? The Consumer Price Index (CPI) is the instrument we use to measure the changes in the cost of things. This is quantified by the Australian Bureau of Statistics (ABS) and they check this on a quarterly basis. (ABC, 2022) Short term price increases can be caused by supply chain issues, which has been the case with cargo shipping during the pandemic. The cost of shipping goods has increased internationally because of increased charges due to public health restrictions impacting across multiple fronts. 80% of all traded goods are shipped by sea via container ships. Increased demand due to lockdowns created a shortage of containers and labour shortages were also a massive problem. - International Monetary Fund (IMF) Blog (28th March 2022)

“Studying data from 143 countries over the past 30 years, we find that shipping costs are an important driver of inflation around the world: when freight rates double, inflation picks up by about 0.7 percentage point. Most importantly, the effects are quite persistent, peaking after a year and lasting up to 18 months. This implies that the increase in shipping costs observed in 2021 could increase inflation by about 1.5 percentage points in 2022.”

Many of us may now consider that the global pandemic is over, despite the fact that lots of people are still dying from Covid. The weekly death rate in Australia is around 80 people.

Internationally it is about 2,500 human beings dying per week. (OWD, 2022) Unfortunately, there is also the war in Ukraine impacting upon shipping via high fuel costs and increased demand because of shortages of grain and high costs for fertilisers. Plus, once companies have increased prices they are usually loath to reduce them going forward. The IMF predicts that inflationary pressures from high shipping cost will continue until the end of 2022 and beyond due to the conflict in Ukraine.

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” - Ernest Hemmingway

Inflation in Australia as of the June quarter in 2022 is according to the CPI 6.1% and this is a rise of 1.8% from the previous quarter. (ABS, 2022) Food was up by 2%, Clothing & Footwear by 3.5%, Housing 2.5%, and Furnishing, Household Equipment & Services 2.5%. The annual trimmed mean inflation rate of 4.9% was the highest on record since the ABS began publishing the figures in 2003. Philip Lowe, the Governor of the Reserve Bank, is not predicting a recession but he was dreadfully wrong about the need to raise interest rates before 2024.

“Because food and energy prices are volatile, it is often helpful to look at inflation excluding those two categories - known as core inflation - which is typically a better indicator of future overall inflation than recent readings of headline inflation.” - Janet Yellen

The pandemic financial assistance pumped huge amounts of liquidity into the Australian economy. This fuelled increased demand for goods and services. Property prices spiked up around the nation, as investors took advantage of record low interest rates on borrowed money. Lockdowns stimulated even greater demand for goods that could be enjoyed at home. People could not travel overseas so they spent their money on things around the home. Prices for goods began to rise because of demand and increased shipping costs.

Why Are Interest Rates Going Up?

The price of credit in Australia was for a long time historically low due to global stimulatory measures by central banks. The United States, ever since the Global Financial Crisis (GFC) in 2008, has been pumping their economy with more money, which saw interest rates plummet for years. Rampant inflation, however, will put a stop to that, as economies attempt to rein in demand without sending themselves into recession. The boom and bust cycle is, it must be remembered, ever present in the capitalist free market economy model. Everything is great until it’s really terrible.

“At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 1.85 per cent. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 1.75 per cent.” - Philip Lowe, RBA Governor (2nd August 2022)

The Reserve Bank of Australia (RBA) has a target inflationary rate of between 2% and 3%. Interest rates have been increased four months in a row. It is likely this will continue until they see the inflation rate fall toward their targeted position. The price of this is a slowing economy and little chance of an increase in wages in real terms. Therefore, as we are all beginning to experience a tightening of the belt is required to survive in the current economic climate. Winter has never been colder for those who cannot afford to turn on the heating in their homes and workplaces.

We are all seeing the inflated prices of goods in the shops and paying increased bills for service charges across a wide range of consumer and business categories. The thing about inflation is that once prices start going up there is a domino effect across the whole economy. No business wants to be left behind when it comes to raising prices. A tacit acceptance of the need to raise prices within the community sees a chain reaction of increases across the board. Petrol prices have been historically high because of the Ukraine situation and the federal government’s fuel excise tax relief will be removed on September 28th, 2022.

“Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation.” - Warren Buffett

High Inflation & Its Impact on Borrowing

One of the serious consequences of all this inflationary pressure is the increased likelihood of those from the lower economic demographic needing to borrow money to survive.

Accessing credit will become more essential and the price of that credit will be more

expensive to boot. Plus, more Australians will find themselves within those expanding lower economic demographics because real wages are sharply going backwards in real terms. The RBA does not want to see wage increases because these are seen within the traditional economic school of thinking to be a major contributor to long lasting inflation. The Catch 22 nature of all this is not so much darkly comic but frightening, especially for those Australians caught up in its effect upon their lives.

“High inflation, in short, tends to worsen inequality or poverty because it hits income and savings harder for poorer or middle-income households than for wealthy households. Households that have recently escaped poverty could be pushed back into it by rising inflation.” - The Brookings Institute (March 2022)

“Median wages of production workers, who comprise 80 percent of the workforce, haven't risen in 30 years, adjusted for inflation.” - Robert Reich

Stagnating wages can be seen to have a causal relationship with corporate investment in new technology. (Besson, 2015) Companies are investing in labour saving technologies at the expense of their workers. Automated information technology not only replaces white collar workers it also devalues their worth to businesses.

Corporations and their boards, CEOs and management are happier to invest in shiny new technologies and far more reluctant to pay their existing staff more. Technology actually means that workers within companies can do more but are expected to do more for less. Less staff needing to achieve more at the same rate of pay or less is the current status quo in many sectors. In Australia, we constantly hear about wages not growing, as if it was an intractable problem without a solution, but the reality is that it is Australian bosses refusing to pay their staff more.

The Current Inflationary Climate & Its Effect on Getting Credit

Traditionally credit can be harder to come by in tough economic times like recessions.

Lenders make more money on less lending due to higher interest rates delivering greater profits. Your credit rating may well come under far greater pressures and a more stringent approach to lending. The need to stay on top of your current economic situation has never been higher. A smart treasurer will keep up to date with the latest data. I would recommend regular and frequent examinations of your credit file during high inflationary times.

Remember that it is free to request a copy of your credit file from the rating agencies every 90 days and whenever you have been refused credit from a lender. The clever cookie checks his or her credit rating prior to applying for any loans or higher purchase. A paucity of wealth means that everyone within the system is scrutinising every detail more carefully in response to the economic drought.

The Chinese laud the rat in lean times because the rat makes do with little and survives. The rat is smart enough to make it through calamitous events. 2020 was the Chinese Year of the Rat. There is likely to be global famine on the cards caused by the increased cost of fertiliser and the loss of grain crops in Ukraine. These international disasters will impact upon Australia and our economy. Fertiliser production requires a lot of energy and energy prices have gone through the roof. Thus, food production costs will be much higher and challenging, especially for poorer nations globally. At the same time Australia and the world are undergoing a major transition to renewable energy from fossil fuels and this will be expensive and challenging. Things are not going to get better anytime soon and, so, being financially clever will be more important than ever before. Keep your consumer credit file close at hand and your knowledge of the information contained within it up to date.

Some individuals may, indeed, find problems within their credit rating file during the current high inflationary economic period. The expression ‘credit repair’ has been bandied about of late and there are businesses purporting to offer this service in the main cities around Australia. What they are really talking about is the restoration of credit worthiness via the removal of negative listings on the consumer credit file. In reality, only incorrect or misleading listings can be deleted. A good legal expert in credit reporting legislation can ascertain the grounds for credit repair far more effectively than an unqualified representative of a finance company out to make money from your misfortune. You can even engage a credit reporting lawyer on a no win no fee basis. When times are tough it pays to have someone who knows the lie of the land down to the last detail. Credit reporting in Australia is governed by The Privacy Act 1988 (Cth). Do you understand all your rights?

References

ABS, Consumer Price Index, June 2022, Released July 2022, Viewed 17th August 2022.

James Besson, How Technology Has Affected Wages for the Last 200 Years, Harvard Business Review, April 2015, Viewed 18th August 2022.

Peter Hannam, RBA interest rates: Reserve Bank lifts official cash rate by 50 basis points to 1.85%, The Guardian, 2nd August 2022, Viewed 18th August 2022.

IMF Blog, How Soaring Shipping Costs Raise Prices Around the World, 28th March 2022, Viewed 18th August 2022.

Indermit Gill, Inflation could wreak vengeance on the world’s poor, The Brookings Institute, March 2022, Viewed 17th August 2022.

Our World in Data, COCID-19 Data Explorer, 14th August 2022, https://ourworldindata.org/explorers/coronavirus-data-explorer , Viewed 18th August 2022.

RBA, Media Statement by Philip Lowe, Governor, 2nd August 2022, Viewed 18th August 2022.

Robert Sudha Hamilton, SpeakTruth: God Knows No Words, Midas Word Publications, May 2022, Viewed 17th August 2022.

ABC Live Blog, What is inflation? What causes it? And who has been hit the hardest?, 27th June 2022, Viewed 18th August 2022.