Households with mortgages are experiencing the fastest growth in living costs on record as the central bank admits it will take more than two years for the full effect of recent rate hikes to hit inflation.
Subscribe now for unlimited access.
or signup to continue reading
As borrowers start to absorb the eleventh interest rate hike in a year, figures compiled by the Australian Bureau of Statistics show annual living costs across the economy are accelerating faster than inflation, rising by between 7.1 and 9.6 per cent in the March quarter - with those with a mortgage enduring the largest rises. Inflation grew by 7 per cent over the same period.
ABS head of prices statistics Michelle Marquardt said living cost indexes were higher than the consumer price index because they incorporated the impact of mortgage interest charges, which are not captured in the official inflation measure.
Ms Marquardt said living cost increases were particularly acute for families including employees because mortgage repayments, which have increased almost 79 per cent in the past year, took a larger share of their spending than for other households.
The ABS official said the 9.6 per cent cost of living increase experienced by employee households was the fastest increase in the index since records began in 1999 and the last time inflation grew at 9.6 per cent was in 1986.
Even self-funded retirees, the group least exposed to living cost pressures, still experienced rises in expenditure in excess of the CPI.
The results underline the scale of financial pain being felt by households from the combined impact of high inflation and rising interest rates.
Reserve Bank governor Philip Lowe admitted that "it is a difficult time for many families".
"Real wages have fallen and those with high debt have experienced a very large rise in their mortgage payments," Dr Lowe told a RBA dinner in Perth. "I want to assure you that the board is very focused on understanding these pressures and we are taking them into account in our decisions."
But he said the central bank was determined to return inflation to within its 2 to 3 per cent target band "within a reasonable timeframe".
"If high inflation were to become entrenched in people's expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment," the governor cautioned.
Dr Lowe's warning came as the Reserve Bank's chief economic forecaster, Marion Kohler, told a business audience that the central bank's own modelling showed that interest rates took "a little over two years" to exert their peak effect on inflation.
Ms Kohler, who head's the central bank's economic analysis department, said it took about 18 months for interest rates to fully effect growth and two years to impact on unemployment.
"[Such] long and variable lags...mean that central banks need to have a view on how the economy will be tracking in the future," she said.
The significant delay in effect has highlighted concerns that the central bank erred by raising rates on Tuesday rather than pausing for a second month to assess the impact of the 10 rate hikes already made to that point.
Deloitte Access Economics head Pradeep Philip said the May rate rise was uncalled-for and the central bank was playing "recession roulette".
"The decision to lift the cash rate [was] unnecessary given 10 previous rate hikes are still working their way through the economy," Dr Philip said.
"Inflation has peaked and is coming down consistent with their [the RBA's] forecasts, the economy was already slowing even before the last two interest rate rises.
"Add to that this issue of lagging effects of policy and you would think there is a good case to pause."
READ MORE:
But Dr Lowe said the central bank was trying to steer the economy along a narrow path of bringing inflation down while hanging on to as much of recent employment gains as possible.
"Underemployment is lower than it has been for a long time, and a higher share of Australians have jobs than ever before. Our society is better off as a result and it is in our collective interest to maintain as many of these gains as we can," he said. "We are still on this narrow path and it is possible that we can stay on it."
Treasurer Jim Chalmers said the RBA had "a difficult balance to strike" but admitted the latest rate hike was a "pretty blunt, pretty brutal reminder" of the inflation challenge.
The treasurer reiterated that next Tuesday's budget would include a "substantial" package of measures to support households.
"It will have more than one element, it will be focused on the most vulnerable Australians," Dr Chalmers said. "There will be help to take some of the sting out of these electricity bills that people are dealing with. There is a substantial plan to make medicines cheaper, to make child care cheaper."
"These are all important ways that the government can responsibly help people through this difficult period right now with these cost-of-living pressures."
