Inflation will outpace wage growth for some time – Forbes Advisor Australia

The sky-high cost of living is the biggest problem for Australians right now, and the latest budget has brought some bad news.

As the budget revealed, wages will be slightly higher than expected, but inflation will be much higher than expected. Inflation will reach almost 8% in the last three months of this year and should now take more than a year to come down. It is only in 2024-25 that we will see wages growing faster than prices, as the following chart shows.

That leaves the Australians further behind. Your salary increases, but he buys less in stores than before. It’s an awful calculation. Things are even bleaker for those who do not use their wages to buy their daily bread. If you have savings, they will probably shrink even faster than wages. If prices go up 6% this year and your bank account is paying 2% interest, you have a 4% spread. That’s a 4% drop in purchasing power this year alone.

If you have a retirement pension invested in stocks, the math could be even worse. If the value of your portfolio is down 10% this year and the purchasing power of its value is down 6%, the purchasing power of your super is down 16%. Better to hope that those dividends are good (indeed, some stocks pay dividends above inflation.)

One way to see how this is going is to look at the budget forecast for consumer spending.

It shows that household consumption will increase by 1.25% in 2023-2024, compared to 6.5% this year. This is less than population growth (expected at 1.4% in 2023-24), which means a collapse in spending per capita. This hinders economic growth.

Wasn’t the budget supposed to reduce the cost of living?

The cost of living measures promised by the Treasurer? Well, they are certainly “responsible and focused”, as he put it. For some people, they will make a difference. But for most households, the difference will be small. A few points to highlight:

1. Subsidies for child care are increasing. The government will invest $1.35 billion over the next fiscal year to make child care less expensive. The highest subsidy increases from 85% to 90%. More than a million families use child care, which could net them a decent savings of $20 a week or more. However, for 90% of Australian households (shared houses, people living alone, young couples, families with older children, pensioners), this does not change anything.
2. The government is reducing the co-payment for treatment under the Pharmaceutical Benefits Scheme by $12.50 from $42.50 to $30. A small group of people can benefit a lot (although the sickest are saved by another policy: the safety net). For most people, this will be minor.
3. Paid parental leave. The government is extending paid parental leave. It is a good policy. However, it is unclear why they placed this in the cost of living section of the budget. It does not reduce prices for anyone. I guess they needed things to add to this section.
4. The government’s plan to “build a million homes”. It starts in 2024. And houses don’t spring up overnight like mushrooms after rain. Let’s see.
5. There is also a tax reduction for electric cars that cost less than $80,000. They no longer attract the 5% import duty.

The changes are “responsible, not reckless – to make life easier for Australians, without adding to inflation”, Treasurer Chalmers said.

As for which prizes matter most? Rents are going up. The budget says this:

“Rental costs are expected to rise significantly over the next two years as the rental market remains tight amid stronger population growth and limited housing stock. Nationally advertised rents have risen sharply over the past year, by 10% through September 2022. As new leases are entered into and existing ones renegotiated, rental costs prices, as reflected in the CPI, are expected to rise.

The budget offers little beyond that observation though. Rising rents are great news if you’re a landlord who can bring in a new tenant. Your income increases. But if you are a tenant? Yeah.

Exception to the rule

The only exception to the rising price rule in Australia is for established homes. Established houses are not included in the CPI. This omission lowers the CPI when house prices rise and supports the index when house prices fall.

So the only thing where your money will go further these days is buying a house. In Sydney, a house that would have cost you $1.1 million in 2021 will now cost around 10% less.

This saving can be more effective if you pay in cash. If you’re borrowing, expect a big increase in mortgage payments compared to 2021. (Also remember, inflation will make a big mortgage look small in the long run.)