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A woman scanning an item at an automated checkout.
9 min read

Explainer

From food to fuel and housing: As inflation surges, this is what it means for your hip pocket

As inflation reaches its highest level in two decades, here's how it affects you.

Published Thursday 28 April 2022
By David Aidone, Sarah Conte
Source: SBS
Inflation, inflation, inflation — cost of living pressures are on the minds of people across the country, and a topic of fierce debate .

The Australian Bureau of Statistics' (ABS) — which highlight the rate of price increases across many categories over a period of time — showed annual inflation surged to 5.1 per cent as of the March quarter, its highest level in over two decades and up sharply from 3.5 per cent three months earlier.

Underlying inflation — which smooths out volatile price swings and is more crucial to the interest rate outlook — jumped 1.4 per cent to 3.7 per cent for the year.

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It is the first time the underlying rate has been above the Reserve Bank of Australia's target of between 2 and 3 per cent since early 2010.

Here's what impact the surge is having:

How is it affecting food?

The latest data shows food prices have had their highest year-on-year rise in more than a decade.

The ABS figures released on Wednesday show the annual rate of inflation soared to its highest level since 2001, with food prices up by 4.3 per cent over the year to March, and 2.8 per cent from the previous quarter.

In an analysis of the data, agribusiness specialist Rabobank said the climb is the highest year-on-year increase in food price inflation since 2011.

Senior analyst at Rabobank, Michael Harvey, said horticulture was a major contributor to the food price hikes, with vegetable prices up 6.6 per cent and fruit 4.9 per cent higher year on year. Beef was up 7.6 per cent.

"Higher cost of meat, seafood and dairy were also significant contributors to food price inflation in the quarter," Mr Harvey said.

Rabobank found there was broad-based price inflation across the "food complex", with rises recorded across all of the major grocery food product categories.

The ABS noted drivers behind food price increases included supply chain disruptions caused by COVID-19, and freight and fertiliser costs. Flooding in NSW and Queensland during the March quarter was also a factor.
AMP Capital's chief economist Shane Oliver also pointed to supply chain disruptions as a key driver of increased prices on supermarket shelves.

Mr Oliver's comments come as Coles Group chief executive Steven Cain said employees and suppliers were working to navigate unprecedented supply chain issues but he expects the challenges will last a couple of years.

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So far this year the supermarket chain has faced staffing issues from COVID-19, a shortage of shipping pallets, trouble finding qualified drivers given immigration restrictions, and that disrupted rail traffic to Western Australia and the Northern Territory and forced 130 stores in NSW and Queensland to temporarily close.

"I can't ever recall a period where the disruption was that extensive, and that was off the back of a good solid Christmas trade, where the supply chain was already under pressure," Mr Cain said on Wednesday morning.

"And it's really been a compounding effect, and that takes time to unwind, not just our suppliers, but also in the market more broadly."
Woolworths also says supply chain pressures have impacted the cost of production and transport for suppliers, and it is working to "manage the industry-wide inflationary pressure on food and groceries".
Mr Oliver said that once the impact of the flooding recedes, there would likely be some downward pressure on fruit and vegetable prices.

Supply chain issues will also ease as the world moves toward living with COVID-19, Mr Oliver said.

"If that's the case, then more people go on holidays and more people spend on services and goods," he said.

"And at the same time, you start to see a pickup in going back to work. So production returns to more normal levels, and consequently, supply goes up and that helps bring prices under control."

How is it affecting housing?

The rise in inflation means the RBA is widely expected to raise the official cash rate, which is currently sitting at a historic low of 0.1 per cent.

Financial markets are fully pricing in the risk of a 0.15 percentage point increase in the cash rate to 0.25 per cent when the RBA board meets next Tuesday, and see further increases in coming months.

If this occurs, Mr Oliver said he expects the banks will pass this on in full to customers with variable rate home loans.

"We think there's some chance they [the RBA] might actually raise the cash rate to 0.4 per cent, and if that's the case the banks will pass on 0.4 per cent," he said.
In the wake of this, Mr Oliver said house prices would start to fall, especially if rate rises continue because prospective customers would not have the same borrowing power as they did in a low interest rate environment.
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Source: RateCity Source: SBS

Property group Domain's latest quarterly house price report indicates the market's boom is slowing, with the combined capital median house price increasing 0.6 per cent over the March quarter — paling in comparison to when the figure increased by 6.3 per cent in the December, 2021 quarter.

Domain's chief of research and economics Dr Nicola Powell said while some capital cities such as Brisbane and Adelaide were performing strongly, combined capital median house price growth was "10 times slower" both quarter-on-quarter and year-on-year.

"That suggests that Australia's property boom is on a slowdown," Ms Powell said.

She said there would need to be a significant fall in prices for them to reach pre-pandemic levels, with the median house price in some cities rising 45 per cent over the past two years.

Mr Oliver said growing rising interest rates would cause increased levels of mortgage stress, but it would not necessarily lead to homeowners racing to sell their properties.

He said many mortgage holders had taken advantage of low interest to pay down their home loans and while some borrowers would be at greater risk, he did not believe they would fall into default.

"I think they'll cut back spending on other areas of their weekly budget," he said.
The ABS' inflation data showed rental prices had increased 0.6 per cent since the last quarter — the largest rise since the September 2014 quarter — and 1 per cent year-on-year.

Ms Powell said every capital city was "technically in a landlord market", meaning the vacancy rate in each is below 2 per cent.

"So it is competitive for tenants," she said. "We've got increasing asking rents, many of our cities are at record-high rents... and the alignment of international borders reopening at a time when our rental market was already strained has placed further demand on the market."

How is it affecting fuel?

The inflation figures showed automotive fuel prices surged 11 per cent over the March quarter, with the growth driven by the Russia-Ukraine war and strengthening global demand.

In March, petrol prices struck record levels of above $2 a litre, which prompted the federal government to halve until 28 September, 2022.

Federal budget papers state that the excise cut should reduce headline inflation by a quarter of a percentage point when this is accounted for in this year's June quarter.

But Mr Oliver said this would make little difference overall.
A man fills up his car at a petrol station
The inflation figures showed automotive fuel prices surged 11 per cent. Credit: Xinhua News Agency / Getty Images
"There's a bit of volatility there," he said.

"The most likely scenario is that petrol price will fall back in the June quarter, and that will maybe knock 0.25 percentage points or so off the inflation rate.

"But whatever it is, it's still going to be a high number. Because even if the [headline] inflation rate is not 2.1 per cent as it was in the March quarter... even if it's at 1.5 per cent, that's still a high number."

He said while lower fuel prices would be a relief for many households, "they're still going to be seeing upward pressure in other areas."

What has the government and opposition said, and when will inflation fall?

Shadow treasurer Jim Chalmers said Prime Minister Scott Morrison — who has blamed the COVID-19 pandemic and conflict overseas for the rise in inflation — should take some responsibility for the inflation increase as Australians were being slammed by the cost of living crisis.

"The war in Ukraine doesn't explain or excuse a decade of this mob going after people's wages and job security and that's a big part of the problem," Mr Chalmers told reporters in Sydney on Thursday.

"(Mr Morrison) needs to take responsibility for once, not point the finger, not go missing when people need him."

Mr Morrison urged voters to stay the course with the Liberal-National coalition as cost of living pressures tighten.
In a time of great uncertainty with cost of living pressures, voters should return his government to power based on its track record, Mr Morrison said.

"Through the course of this pandemic, we got through this together because (Australians have) been making wise decisions and the government has been doing the same to back them in," he said.

"We have been wise stewards of taxpayers' money as well to ensure our economy is set up to perform in a very, very challenging environment."

Mr Oliver said there's not a lot the government could do in the short term to bring down inflation beyond measures — such as the — to help households cope.

"Longer term, there are things governments can do to boost the supply side... [including] measures to boost productivity, reform the tax system, and boost competition in the economy, but they take a long time to implement."

With additional reporting by AAP.

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