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The Inflation Shortfall – Opportunities and Strategies for Homeowners - featured image
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The Inflation Shortfall – Opportunities and Strategies for Homeowners

Recent data from the Australian Bureau of Statistics (ABS) reveals a 0.6% rise in the Consumer Price Index (CPI) for the December 2023 quarter, marking the slowest quarterly increase since March 2021.

This brings the annual inflation rate down to 4.1% from 7.8% in 2022, hinting at a potential pause in the Reserve Bank of Australia's interest rate hikes come February.

In this quarter, housing, alcohol, tobacco, insurance, financial services, and food and non-alcoholic beverages were the primary inflation drivers.

Housing costs, in particular, surged due to new dwellings for owner-occupiers, rising rents, and utility costs.

Inflation2

Steve Mickenbecker, Canstar’s Group Executive of Financial Services, interprets these figures optimistically.

He notes:

"The December quarter's modest CPI increase aligns the economy closer to the Reserve Bank's target inflation band of two to three percent.

This trend, if it continues, could bring the annual inflation rate to 3.3 percent, offering relief to mortgage holders who've significantly contributed to stabilizing the economy."

However, the reality remains stark for the average Australian.

With living costs up by 4.1% in 2023 and not many receiving equivalent wage hikes, the financial pressure is palpable.

This is compounded by the previous year's 7.8% cost of living spike, leaving many struggling to keep up.

Despite the phase three tax cuts adding some inflationary pressure, the Reserve Bank maintains their minimal impact.

Still, these cuts offer a slight cushion against the rising cost of living.

It's important to note that while inflation may be slowing, past price increases are likely here to stay, subtly reshaping our financial landscape.

Interest rates - a lingering challenge

Home loan borrowers have faced a challenging period since May 2022, with a 4.25 percentage point hike in the cash rate.

Canstar’s research reveals this has led to a staggering 62% increase in repayments, adding about $1,562 to $2,603 monthly on average-sized loans.

Here's a breakdown of the impact on monthly home loan repayments:

Loan Amount Apr-22 Repayment Dec-23 Repayment Increase
$500,000 $2,103 $3,404 +$1,301
$600,000 $2,523 $4,085 +$1,562
$750,000 $3,154 $5,106 +$1,952
$1,000,000 $4,205 $6,808 +$2,603

Source: www.canstar.com.au

The inflation shortfall and its impact

For an average working Australian earning $95,581 annually, keeping pace with inflation would have required a $3,919 raise this past year.

Unfortunately, this scenario is unlikely for many, exacerbating the financial strain.

Here's how inflation impacts various income levels:

Inflation Applied to Annual Income (4.1%)
Income Dollar Increase
$70,000 $2,870
$95,581

(Average full-time earnings)

$3,919
$110,000 $4,510
$130,000 $5,330
$150,000 $6,150
$170,000 $6,970
$190,000 $7,790
$210,000 $8,610

Source: www.canstar.com.au

Mickenbecker advises:

"If your wages haven't matched inflation, it's crucial to find ways to bridge this gap yourself.

While changing jobs can boost income, there are other strategies to significantly ease your household budget."

Canstar’s Cost of Living Comparison suggests potential savings of up to $12,741 in the first year by switching to more cost-effective options for home loans, insurance, utilities, internet, phone plans, and groceries.

Public sentiment and the road ahead

Canstar's recent Consumer Pulse Report highlights that 76% of Australians haven't felt any relief in the cost of living over the past year, primarily due to unchanging or increasing bills.

A significant portion attributes this to an inability to reduce expenses, decreased income, or other factors.

About Chris Dang is an accountant by training and has worked in the Financial Planning industry for many years. Chris brings together property, accounting, and financial planning experience to help clients of Metropole Wealth Advisory create a holistic plan for their wealth.
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