Inflation is coming down, but cost-of-living pain continues to bite

Goods and services were still more expensive in the three months to December than they were in the three months before that. And will be higher again in the current March quarter.

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That said, the rate of inflation is coming down faster than even the RBA had forecast, suggesting that the central bank now has its arms around the problem.

This doesn’t solve the cost-of-living issue – many people are still finding it tough to balance their household budgets.

There are two things that need to happen to loosen the grip that is squeezing Australian wallets – interest rates need to start falling and wages need to rise faster than inflation.

Economists including Stephen Smith, a partner of Deloitte Access Economics, say that wages in the December quarter grew faster than inflation, so we experienced real wages growth.

But there is a lot of catch-up to do before we have the same purchasing power we had before the pandemic.

The pain will have a long tail.

The trouble is that there are certain categories within the basket of goods and services making up the inflation figure that remain elevated, and some cannot be avoided.

The most significant price rises in the December quarter were tobacco (up 7 per cent), and the cost of new houses (up 1.5 per cent), while domestic holiday travel and accommodation costs 3.9 per cent more and medical and hospital service expenses grew 1.2 per cent.

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Insurance also stands out as one of the stickier inflation items, and there are few signs that this is going to improve.

People may reduce their smoking habit or cancel holiday plans, but we all need to rent or own a house. Seeing a doctor is not a discretionary item and arguably neither is insurance.

Most other categories are rising, but at a lesser rate than experienced in the previous quarter.

And there are some like transport, education, and household furnishings and equipment in which prices are actually falling.

Particularly weak retail spending numbers for December demonstrated that Christmas was a disaster for retailers, and spending is expected to remain weak for some time yet, according to Smith.

That weakness will only reverse when real wages begin to rise in earnest and interest rates come down meaningfully.

Both will happen, but don’t hold your breath.

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