Inflation remains a key concern for many Australian households, and the Reserve Bank of Australia (RBA) has signaled that the higher cost of living is likely to persist in the long term. According to News, RBA assistant governor Sarah Hunter addressed these ongoing challenges, stating that everyday expenses, such as milk and petrol, will not return to pre-pandemic levels.
Despite some positive economic trends, such as wage growth and interest rate cuts, the rise in prices for essential goods is a structural shift in the economy. This reality leaves Australians facing a new financial landscape that is unlikely to revert anytime soon.
Higher Prices Are the New Normal
In a frank address to the Australian Finance Industry Association, Sarah Hunter pointed out that Australian households have made significant progress in terms of managing their finances. However, she emphasized that consumers can expect prices for staples like bread, milk, and petrol to remain high. For many, these hikes in everyday items have become a permanent “sting” to their wallets.
The cost-of-living is now higher, and we are not trying to bring the price level down – Hunter explained.
My personal price point on this is the milk I get in the supermarket every week, which is an awful lot more expensive than what it was pre-Covid.
This sentiment resonates with many Australians who have noticed the creeping increase in grocery costs, with essentials costing far more than they did just a few years ago.
Despite the frustration that comes with the permanent rise in these basic expenses, Hunter clarified that the RBA’s focus is not on deflation but on managing inflation. The central bank is committed to keeping inflation within a target range rather than reversing the price increases entirely. Inflation, which had been a significant concern, is now stabilizing.
As of the June quarter, underlying inflation was at 2.7%, coming close to the RBA’s target range of 2-3%. This indicates that inflationary pressures are easing, but the higher cost of living will remain a fixture.
Positive Signs Amid Rising Costs
While the cost of living is undoubtedly higher, there are some glimmers of hope. Hunter noted that, despite the ongoing price increases, Australian households are starting to get a better grip on their finances.
Household conditions have shown signs of improvement over the past year. One major factor is that wages are now growing at a faster pace than the rising prices, offering relief to many workers.
Households are beginning to get on top of prices – Hunter said.
Wages are growing faster than prices, so the average worker is taking more home in real terms.
Furthermore, the implementation of stage three tax cuts, which came into effect a year ago, has given many Australians an extra boost to their take-home pay. For those with variable-rate mortgages, the three interest rate cuts in the past year—one each in February, May, and August—have also provided some financial relief.
These rate cuts, amounting to 25 basis points each, have been a positive development for many households.
However, it’s important to note that the positive effects are not being felt universally. While some Australians are seeing their financial situations improve, others continue to struggle.
Older Australians with savings or those trying to enter the housing market are still feeling the strain. In particular, those who are not benefiting from the rate cuts are bearing the brunt of the economic shift.
Inflation Close to Target, But Challenges Remain
The RBA has been actively managing inflation throughout its recent monetary policy decisions, and according to Hunter, underlying inflation is now close to the bank’s target of 2 to 3 percent. Over the June quarter, underlying inflation came in at 2.7 percent, signaling that inflationary pressures may be stabilizing. Employment levels are also expected to remain steady, offering some assurance that the labor market will continue to support the economy.
However, the journey ahead is far from straightforward. While inflation has moderated, and interest rates have dropped, the cost of living remains high. The next rate decision in November will be critical, with markets anticipating another rate cut to offer further support. Still, for many Australians, the sting of higher prices will persist, reminding them that the new normal is one of higher living costs.
