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Over the past two years, high inflation has resulted in many Australians ‘feeling the pinch,’ as the cost of food, clothing and other necessities has risen. This has played out in recent data from relief organisation Foodbank, which showed nearly a third of households (32%) had experienced food insecurity in the past 12 months.
High living costs have led to more Australians going hungry
This figure – published this week as part of Foodbank’s 2024 Hunger Report – accounts for 3.4 million households and means in the worst cases some family members go entire days without eating because they have simply run out of food.
At a minimal level, the report shows all households accounted for have reduced the quality, variety, or desirability of their food.
This week’s data is a slight improvement from 2023, when the issue affected 3.7 million households, but some sectors of the Australian community continue to show historically high levels of poverty.
The inflation numbers underpinning this reality tells an interesting story. Australia’s monthly consumer price index (CPI) peaked at 8.4% in December 2022 but has been softening, albeit not sitting comfortably within the Reserve Bank of Australia’s 2-3% target band until August, when the reading came in at 2.7%.
Side by side, the central bank has ignored calls to cut the cash rate, keeping it steady at 4.35% since November 2023.
Government spending the driving factor
Founder and chief executive officer of Australian Investment Education Andrew Baxter said that while supply chain issues following COVID-19 had provided an initial impetus for prices to rise, government spending was the major underlying reason why they had remained stubbornly high.
“The reason why we’ve seen inflation as sticky as it is, is largely down to government policy and additionL money flowing into the economy via subsidies and various spending initiatives,” Mr Baxter explained.
He pointed to Australian job figures, which revealed most employment growth was in public sector positions, as evidence of where the economy was running on high government spending, rather than broad based economic growth.
“According to the latest employment data, we’ve had 820,000 jobs added under the current government, of which around 75% of those jobs are seemingly in the public sector,” he said.
“So, there isn’t a productivity increase growing the economy – there are jobs happening, but they’re on the cost side/tax payer funded of the ledger, rather than being part of an expanding economic growth cycle.”
The RBA: new Governor, ongoing challenges
In the context of this spending, the RBA – under Governor Michele Bullock, who was appointed in September 2023 – has had a difficult tightrope to tread between calls to cut the cash rate and the need to keep the economy on an even keel.
Mr Baxter said part of what was making Australians feel hard-done by, was a suggestion made by previous Reserve Bank chief Philip Lowe in 2021 that the cash rate would not rise until 2024.
In fact, it rose by 25 basis points (from 0.10%) in May 2022, kicking off an upward trajectory that only ended at the tail end of 2023 – with the rate on-hold at 4.35% since November of that year.
“Effectively, I think Lowe’s statement gave the green light for people to borrow with a degree of comfort, knowing that rates won’t’ change, at least according to the RBA Governor” he said.
“So you have a market or audience or country that was told, don’t worry about interest rates, keep borrowing and spending.
“And then the RBA went whoops, we’ve got to try and put the genie back in the bottle.”
Between a rock and a hard place
Michele Bullock, he added, had been a far more astute communicator.
“She has made it very clear that the RBA is an independent body: it doesn’t have a political bias, it has a task to ensure that the economy is operating at a certain level with inflation in certain bands,” Mr Baxter said.
“The challenge is – I suspect – that on the other side, you have a government which is spending money like a drunken sailor.
“And so you have significant political pressure for the RBA to cut interest rates. It’s even been touted that the current government have been looking to change the way interest rate decisions are made.
“Added to which, further pressure for rates to be cut is at odds with Government policy that continues to indulge in significant spending.”
Until that circle was squared, it would be difficult for the Reserve Bank to start reducing rates, he added.
So how should Australian consumers navigate the high-cost environment?
Tip 1: Check where your money is going
Mr Baxter said it was ‘absolutely pivotal’ for people to develop a budget, and to check where their money was being spent.
“We all have an idea of where our cash goes, but if you actually sit down and document it, there’s a fair bit going out the door that people don’t even realise,” he said.
One example of how easily money could dissipate was the ‘aspirational spending’ associated with mobile phones, wherein people often felt the need to spend big on the latest gadgets, he added.
It was important to remember though, checking spending in this manner was not a punishment, but an opportunity.
“All budgeting allows you to do is guarantee that what you want in the future, eventually becomes a reality by making some short-term sacrifices now,” Mr Baxter said.
Tip 2: Clean up cash leaks
After assessing the state of their spending, consumers should begin to remove unnecessary costs.
“A good example of that is subscriptions,” Mr Baxter said.
“It’s so easy to have a gym subscription you haven’t been to for six months, or Netflix which you haven’t watched because it’s summer and you want to head down the beach.
“Whatever it is, have a look and start to eliminate those sort of expenses that you don’t use and that aren’t giving you the sort of utility you need.”
Tip 3: Eat at home
In terms of saving money, Baxter said “Eating at home is a huge thing.”
“Eating out should become a treat rather than ‘I can’t be bothered to cook tonight so I’ll get Deliveroo or Uber Eats’,” he added.
“The other benefit of doing that is if you’re eating at home and you’ve cooked, you’ve potentially got leftovers to take to work tomorrow.
“The issue has become more marked as we’ve seen an end to work from home, because if you’re going back to the office, you find there’s a subway, or a sushi place around the corner that’s tempting you to go and shell out your $15 or $20 for lunch, whereas you could have taken last night’s leftovers, which you would most likely have had, when you were working from home.”
Tip 4: Check and consolidate debts
One way Australians could maintain healthy finances was to avoid bad debts, Mr Baxter said.
“People can often fall foul of ‘buy now pay later’ or credit cards, where they’re paying minimum balance and getting clobbered with 16 to 17% interest,” he said.
“It’s really important to focus on reducing that, and to understand how that debt’s come about, particularly with the ‘buy now, pay later’ stuff.
“Additionally, if you’ve got credit card debt and you’re working at chipping away at it, looking at consolidating all that debt and maybe taking out a personal loan which might be 9 to 10% interest per year is going to save you money straightaway. The key thing if you do this, is to not then start racking more debt up on your credit card.”
Tip 5: Make your money work for you
A final piece of advice for navigating stormy economic waters was to make sure if you have extra cash, you invest it wisely.
“Consider cash at the bank,” Mr Baxter said.
“If you’re earning 5 to 6% on a term deposit might sound good, but if inflation is really running at 4.5 or 5%, your real return on that is not much.”
“You’ve got to look at assets to invest in if you’ve got surplus cash, which have the ability to grow significantly above that inflation level so you’re getting a real return on your money.”
He added taking this step did not require any particular expertise in the investment space.
“You can put your money into an Exchange Traded Fund. We do it all the time for our clients: and you’ve got something that’s giving you the ability to have some decent upside,” he said.
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