The majority of Aussies felt no cost of living relief last year - how can you beat the inflation shortfall?

The inflation shortfall and how Aussies can make up for it at home

The Australian Consumer Price Index (CPI) rose by 0.6% in the December 2023 quarter and 4.1% annually, according to the latest ABS data released today. This is the slowest quarterly rise since March 2021.

The annual inflation rate for 2023 has fallen to 4.1%, down from 7.8% for 2022 and gives room for the Reserve Bank of Australia to hold the cash rate steady in February.

The biggest contributors to inflation in the December 2023 quarter were housing, alcohol and tobacco, insurance and financial services and food and non-alcoholic beverages.

Housing was driven by new dwellings purchased by owner occupiers, rents and utilities.

Canstar’s Group Executive, Financial Services, Steve Mickenbecker says, “The December quarter CPI increase of 0.6 percent restores the economy’s trajectory towards the two to three percent target band for inflation and should satisfy the Reserve Bank that it doesn’t need a further rate rise in February.”

“Another quarter with a result like this would see annual inflation fall to 3.3 percent bringing it within striking distance of the Reserve Bank’s three percent upper limit. This is a welcome piece of good news to mortgage holders who must feel they have done more than their share to put the economy back on track.

“Even for those without a mortgage, the going has been tough over the past year with the cost of living up by 4.1 percent. Not many workers have enjoyed the 4.1 percent wage increase in 2023 needed just to tread water. Coming on top of the 7.8 percent increase in cost of living in the prior 12 months, even fewer people will have kept pace.

“The phase three tax cuts will add a little inflationary pressure, but the Reserve Bank remains adamant that the impact will be immaterial. Meanwhile, the cuts will provide some small relief from cost of living increases.

“Lower inflation for the quarter is good news with the brakes gradually slowing price rises, but no one is giving back price rises that are already in the cash register. These are largely baked in.

“Interest rates won’t be falling any time soon, with the banks expecting the first cut in the second half of 2024. Borrowers will be left licking the wounds inflicted on the household budget by home loan repayments rising by 62 percent over the past year and a half.”

Home loan borrowers have endured since May 2022 a 4.25 percentage point increase in the cash rate, which according to Canstar’s research has increased repayments by 62%, adding approximately $1,562 to the monthly repayments on an average $600,000 loan over 30 years or as much as $2,603 for those with a $1 million loan.
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Source: www.canstar.com.au. Monthly repayment calculations based on a loan repaid using P&I repayments over a total loan term of 30 years. Calculations assume a pre-May cash rate average variable rate of 2.98% (based on owner occupier, variable loans on Canstar’s database, available for a loan amount of $500,000, 80% LVR and P&I repayments; excluding introductory and first home buyer only loans), with increases in rate based on applying the applicable increase in cash rate.

The inflation shortfall

The average working Australian earning an annual income of $95,581 would have needed a $3,919 pay rise to have kept pace with inflation over the past year, according to Canstar’s analysis.
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Source: www.canstar.com.au – 30/01/2024. Average annual income per ABS Average Weekly Earnings, May 2023. Inflation per ABS Consumer Price Inflation, December 2023.

Mickenbecker says, “If the boss hasn’t bumped up your wages to match inflation, which is highly likely for many working Aussies, you have to try and make up the shortfall yourself.”

“Switching to a new job usually helps boost your wage but there are other ways you can make a huge difference to your household budget. Canstar’s Cost of Living Comparison shows a potential $12,741 can be saved in the first year by switching from the average to the cheapest or best-valued option for home loans, car insurance, electricity, home internet, phone plans, at the grocery store and much more.

“Making these big savings can reduce the size of the dent that inflation has inflicted on household budgets.”

Canstar’s latest Consumer Pulse Report released in December found the vast majority, that is 76% of Australians, have not felt any cost of living relief in the past year, with most (81%) putting this down to their bills staying the same or even increasing. One-third (33%) say it’s because they haven’t been able to cut costs, 17% say their income has decreased and 2% put it down to other reasons.

Summary of inflation over time

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Source: ABS Consumer Price Index. Prepared by Canstar on 31/01/2024.
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Source: ABS Consumer Price Index. Prepared by Canstar on 31/01/2024.

If you’re feeling the pressure of inflation you can find out more about budgeting and saving with Canstar.

Cover image source: Denys Kurbatov/Shutterstock.com