Inflation is coming down, cost-of-living remains high

An economic update from Mishalia Birch (Government & Public Relations Manager, IBA / Torres Strait Islander woman) and Siddharth Shirodkar (Principal Economist, IBA).

Key points:

• The RBA left the cash rate unchanged in August 2024
• Key influencing factors: international energy and supply chain issues, domestic consumer sentiment, and the June quarter inflation figure which was 3.8%
• US trends suggest Australian inflation may subside after a few more months
• The high cost-of-living is affecting people’s wellbeing

A strong focus of our economic updates has been on inflation, which is the continuous increase in prices. When prices grow faster than our income, some of the goods and services we demand become unaffordable. Some things we can live without, but other things like groceries, energy and housing are essential. It is a big problem for many households, including First Nations families.

While Australian inflation reached as low as 3.4% in December 2023, hopes for further falls were dashed. Inflation rose slightly to 3.8% on an annualised basis by June 2024 (Chart 1). We are below the peak in December 2022 (8.4%) which is a good thing, but inflation has remained stubbornly higher than the RBA’s 2?3% target rate. And the previous price rises are now built into our spending.

Chart 1: Monthly inflation annualised in Australia and the US, June 2024

The recent high inflation we’ve experienced means if we were buying 12 products before the pandemic, we can only buy 11 products now. That puts a real strain on many families, which is creating the current cost-of-living crisis. Higher inflation, particularly for essentials, hits families on low incomes the hardest. That 12th product could have been clothing or groceries. Despite inflation remaining above the target rate, the RBA left the cash rate unchanged at the August 2024 meeting. The fact that inflation reduced to 3.8% by the end of June (on a monthly and quarterly basis) was a welcome sign, given that it reached 4% in May 2024, which had a lot of people worried.

The future of inflation will depend on various factors such as energy prices, supply chain issues and issues like consumer spending habits. International factors are playing a significant role in the inflation outlook, including the possibility of escalating conflict in the Middle East. Suggestions are that US inflation and economic growth prospects has come down sufficiently for the US Federal Reserve to consider ?a rate cut in coming months. Australian inflation has tracked the US with a 6?month lag (Chart 1), so if this trend continues, we may have a few more bumpy months of inflation before entering the RBA’s target band of 2-3%.

Why does the RBA want to keep inflation between 2-3%?

This is to manage inflationary expectations. If people expect higher prices, they may spend more now, increasing demand and causing businesses to raise prices. This creates an upward inflationary spiral. The RBA uses the cash rate to control these expectations, which is a key tool for managing inflation. Potential cash rate hikes may lead people to save more, and spend less, reducing pressure on prices. But cash rate rises tend to affect lower income households more, particularly those with a mortgage who are just making ends meet.

Economic growth and employment

The ‘real’ economy looks at what is happening in terms of actual work done, and what is happening with employment. Economic growth has been minimal, with just 0.1% in the first quarter of 2024 and 1.1% over the last 12 months. The economy has been shrinking per person due to the rising cost of living. The total number of employed people continues to break records in Australia, with currently 14.4 million Australians at work. Population growth is driving this, including migration, which is one of the key factors that has kept the Australian economy going.

Unemployment remains low but has risen to 4.1% as of June 2024 (Chart 2). The underutilisation rate provides a more comprehensive picture of unemployment as it includes unemployed people and people wanting to work more hours. That rate is around 10.5%, which tells us that we are still at historically very low levels of spare capacity in the economy. This has been tracking slightly upwards over the past two years, which if the trend continues, will reduce pressure on inflation.

Chart 2: Unemployment and underutilisation rate, June 2024

What does this mean for you and me?

The cost-of-living crisis is having an impact on our overall wellbeing. To make ends meet, some people are working longer hours. There are still plenty of vacancies in the economy, and some people are taking on a second or third job. But that can also take away from spending time with loved ones. That is the kind of wellbeing impact IBA is also considering for our customers.

Today, even going out to dinner can quickly eat into the disposable income we might have after paying our bills. Daily coffees are becoming unaffordable for some, and even the go-to 380g tin of bully beef has reached a whooping $8.20 (that’s more than $21 a kilo!). This is an example of how some people are going without a few of the essentials, which can also lead to tough situations such as food insecurity and not getting enough nutrition, struggling to pay the electricity bill, pushing off the doctor’s visit, and having a hard time finding places to live.

Aboriginal and Torres Strait Islander people are communal; we look out for one another. Many of us financially support not only ourselves but also our extended families. As our cost of living rises, so does the cost of living of those we support. The high inflation of the last couple of years is pushing some people so hard that it is impacting on our relationships, the ability to support loved ones, and our own mental health.

The reality is this is something we will need to continue budgeting. That means we need to be extra mindful of how we are spending our money. Particularly during off week (if you know, you know).

Single-carer families in particular are feeling the financial pressure. In our 2023 Impact Report , one customer talked about how the constant threat of rising interest rates adds further stress, as even the slightest increase can have a significant impact on a single parents’ budget saying, ‘my mortgage repayments have now gone up 40 bucks and for me on one wage, it’s a fair whack..…that’s bread and milk for a week. For me, my kids go through like two, three loaves of bread a week and a three-litre milk.’

So, what can we do about it?

A detailed budgeting spreadsheet might not be practical for everyone, but understanding our general expenses is crucial to identify where we can save and cut down on ‘discretionary’ living expenses – these are nice-to-haves, but we can put off that spending for a bit. This includes things like suspending some subscriptions and switching to cheaper alternatives.

IBA offers free online budgeting workshops regularly.

If you want to know how to create a budget, and understand your income and expenses then How to Create a Budget is for you.

If you need help with budgeting for business (revenue, expenses, cashflow, finance reports, profits and tax) then register for one of our upcoming Business Budgeting Basics workshops.

Are you an IBA customer experiencing financial hardship? Contact us on 1800 064 800 to discuss your options. It’s also free to call the Mob Strong Debt Helpline on 1800 808 488.

What do you want to read more about? These articles cover off on the key economic topics and issues that are impacting Aboriginal and Torres Strait Islander people today. Tell us what you want to know – leave a comment or email us at [email protected] .

Legal Disclaimer

The information contained in this material is general in nature and not tailored to your particular circumstances, objectives or needs. If you are eligible and decide to apply for products or services from IBA you should obtain independent financial and legal advice before signing any documentation or making any significant financial decisions and you should rely upon your own independent advice and inquiries. While IBA has no reason to believe that the information in this material is inaccurate, the truth or accuracy of that information cannot be warranted or guaranteed and may have changed since it was prepared. IBA takes no responsibility for any damage or loss suffered by you in relying on the information in this material.

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