I Need an Idiots Guide to The Cost of Living/Inflation/Interest Rate Rises We Are Currently Experiencing

Richmond Tigers on 05/07/2022 - 14:10

I cannot get my head around this whole concept.

Shit has gone up in price because of war essentially cutting off crucial supplies of food and fuel.

This has created scarcity in some areas whereby the price rises and in turn, those goods up the chain go up in price to cover expenses.

As a result people have had to spend more money and the RBA doesn't like too much money being spent, so interest rates have gone up to curtail spending, limiting credit being handed out and providing more incentive to save money to earn interest.

Now that is my bog average understanding of it up to that point and it may even be nearly right.

Now in an isolated economy, in theory people spending less would drive down the price of goods and services and result in lowering of prices. But with the main driver of this inflation being overseas war, does an interest rate hike actually achieve anything by ways of lowering the price of goods and services?

It's this I can't really grasp. What are the tangible effects that an interest rate rise wants to achieve in our current scenario?

Is it a good thing for the economy? The whole point of stimulus in the past was to pump more money into the economy to prop up business, does keeping money in bank accounts benefit business? Will inflation stop people from buying higher end products and see businesses and brands go belly up? Will the government have to do something stupid like allow people to take out super because of public outcry about people struggling?

Financial

Comments

  • randomusername2017 on 05/07/2022 - 14:18
    +2

    @SlavOz

    • spackbace on 05/07/2022 - 14:30
      +33

      You'll get a response in 3 weeks ;)

      • [Deactivated] on 05/07/2022 - 15:54

        lol …….. what was he done for this time?

      • randomusername2017 on 05/07/2022 - 15:54

        Limited supply, does that mean demand increases?

        • [Deactivated] on 07/07/2022 - 10:51
          -1

          all these war stuff just excuse. retailers and banks want to dip into your pocket further and get more of your hard earned money. Employers don't give jackshit payrise so you'll be living on baked beans.

    • Duckie2hh on 05/07/2022 - 15:08
      +7

      he will just blame the COVID vaccine

      • Drakesy on 05/07/2022 - 15:30
        +13

        HOW COULD DANIEL ANDREWS DO THIS!1!1!1

        • AndyC1 on 05/07/2022 - 15:39
          -1

          ScoMo was el capitan on the bus on the Bolivian highway before the crash.

    • markathome on 08/07/2022 - 01:51
      +3

      OP should study economics. Then he'll still not be able to explain inflation but he'll have an economics degree.

      https://www.abc.net.au/news/2021-10-10/does-anyone-know-wher… (Economists have no general theory of inflation?)

      More seriously, if people have to spend more money on their mortgage they'll probably spend less of it elsewhere. In theory that should suppress prices. But, less so for petrol where the supply constraints are hiking prices and demand is inelastic (except if you were to have another lockdown). That's a problem because petrol prices spill over to the fruit and vegetable that are transported and the retail workers that can't yet afford a Tesla to drive to work. That leads some commentators, such as Alan Kohler, to criticise the RBA's approach.

      So why do it? Well for one thing the currency would likely slip if the Reserve Bank refused to raise interest rates. Currency stability is one of the four responsibilities of the RBA - controlling inflation is NOT one but there are three others.

      A better explanation is probably the hippie-esque logic that inflation is caused by the expectation of inflation. Phillip Lowe himself has suggested this, so raising interest rates breaks the self-perpetuating cycle. And leaving interest rates on hold would result in even worse inflation.

      • markathome on 08/07/2022 - 01:56

        Also liked and agreed with Hearthstone's explanation which is strange because it reads differently to mine.

  • Hearthstone on 05/07/2022 - 14:26
    +27

    The only tool RBA got is to squeeze demand by making everything expensive and you poorer so people spend less and hopefully prices will come down.

    by raising rate, business will think twice before they build a new factories or hire worker that will have a downside demand effect on jobs
    By raising rate, you end up paying more for your mortgage, people have less money in their pocket and hopefully people stop buying stuff reduce demand
    less demand usually means price will come down or business offer discount.

    that the theory and a lot of this can lead to a recession but they try to manage it without having one but it is a tough act but they can't leave inflation going unchecked it will destroy everything else so, they have to act and whatever it takes to control inflation, now if the economy hit recession well it something we all have to accept and prepare for

    Also, recession is inevitable in a capitalist country or any vibrant economy, it wiped out the weak that are over leverage and don't deploy their capital efficiently and left the strong standing with better asset and capital allocation.

    • Richmond Tigers on 05/07/2022 - 14:39
      +5

      Ok part of that makes sense as I haven't obviously thought about it, the fact that if people stop buying particular things, then those companies need to make those things cheaper to trigger spending.

      So while essential may stay high, maybe alternatives come down in price and people may switch to these items? (for example drinking cognac instead of milk).

      • Quantumcat on 05/07/2022 - 17:08
        +6

        those companies need to make those things cheaper to trigger spending

        They won't be able to if the raw materials and manufacturing / transport costs mean they can't. They just won't sell many and businesses will shrink.

      • od810 on 07/07/2022 - 18:06
        +1

        A lot of economists suggested the RBA's rate rises won't solve the problem. This is not the traditional inflation problem where you have demand increases -> unemployment dropped -> wage rise etc ( we have some part of it, i.e. unemployment drop and wage rise) but the main issue is supply drop.

      • Kangal on 07/07/2022 - 19:44
        +1

        Generally technology allows goods to be higher quality and lower price, with the passage of time. It is the CEO's job to go against this trend and increase profit margins (thereby revenue) for the shareholders. Psychology and Marketing are the vice tools to accomplish these targets.

        The same goes for services.
        However, with companies battling to increase prices and get your business, it creates a weird dynamic. You see booms, busts, and general trends.

        Also, due to lack of foresight in the 1940s and 1970s, our money is not based in reality. It primarily holds value by people's belief in it. It isn't backed by Crypto or Oil or Gold or Land. So it is not that things are getting more expensive, it is that the money is losing its value. Your wages aren't going up/down, you just get paid in a medium which keeps losing value.

        Imagine if every $100.00 of AUD was backed exactly by 2.0000 Grams of 24ct Gold. And imagine if it was impossible for the government to print new money if they didn't mint new Gold. And let's say this happened in 1 July 2019. Now it is 3-years past. And suddenly life looks great in Australia, since our money is worth double compared to the Euro and USD, and even more compared to other currencies. That's the big driver of inflation; the fact that it is built into the economy. Things like; market bubbles, pandemic, scarcity in services, scarcity in goods, war, petroleum prices… those merely exasperated the issue. Without those occuring we would still have inflation issues, but the rich/powerful would have gone back and found a new thing to put the blame on (Communism/Chinese politics/Aliens/Religion/etc etc).

    • MrCAMEL on 05/07/2022 - 21:51
      +8

      Raising rates mean people with debt have less money. Raising rates mean people with money get more money. So what's to stop the people getting more money, spending their more money? That's basically the opposite of what's supposed to happen isn't it?
      Suppose at the 'end' off this adjustment, all the people with money started spending again and the people with debt did their best just to survive, wouldn't the whole 'thing' start again?

      More and more I think it's best everyone takes their backyard, gets and chickens for eggs and a cow for milk, someone on the street grows grains, people grow their own food. Time to go back hundreds of years to a more simple life. People have got used to what they are used to in the last few years and things are changing!

      • Hearthstone on 05/07/2022 - 22:18
        +8

        People that are debt free are a lot less than people with debt, the economy cycle is fed on debt and credit so the majority dictates the cycle

        When debt is expensive and assert price drops the people with money also see their wealth declining and their business maybe earning a lot less income
        or if they get dividend from the stock market, their dividend cheque could be a lot less so they think twice before spending more.

        Raising rates does work, it just takes a bit of time to filter through, part of the cycle, boom, bust and recession it just Australia hasn't had it for a few decades people forgot about them but as sure as the sun rise the next day the recession and bust cycle will be back

        • MrCAMEL on 06/07/2022 - 07:08
          +2

          But I feel that forcing people to pay more interest on debt and someone getting a lower divided are on the opposite ends of the affected by interest rates scale.

          • serpserpserp on 06/07/2022 - 19:02

            @MrCAMEL:

            People that are debt free are a lot less than people with debt

            This is his first line. Completely answers what you wrote here.

            But even getting a smaller dividend makes a retiree etc spend less on stuff cause their revenue stream is lower.

        • virhlpool on 07/07/2022 - 00:01
          -1

          People that are debt free are a lot less than people with debt, the economy cycle is fed on debt and credit so the majority dictates the cycle

          This is not entirely true. They aren't 'as lot less'. Look at the home ownership percentage of Australia - more than 30% don't own home and among those who own, a lot of them are debt-free or have a very small debt left.

          • Hearthstone on 07/07/2022 - 10:42

            @virhlpool: rate rise will hit everyone, even if you don't own your own home, your landlord may raise your rent to recoup some of this increase
            your car loan going to be more expensive, any money you borrow going to be expensive, some has more debt than other but almost everyone has some form of debt, be it education, car, holiday, housing, TV, Fridge etc…

            capitalist model is credit based, you can't escape it, that the nature of the beast and most of this stuff is out of your control, what you can control
            are your personal circumstances like spending pattern, saving and investment

            if you can control those things nothing can stress you out not even high rate or unemployment

      • GandalfTheCheap on 06/07/2022 - 21:21
        +8

        Rich people who get extra money don't tend to spend it, since they have less need to.

        Poor people who get extra money spend it immediately (and are more likely to spend it at places owned/staffed by other poor people, who spend it, and so on).

        That's why stimulus money is several time more effective when given to the needy.

        It's also why interest rate hikes curb inflation.

    • Dontdoit on 06/07/2022 - 12:39

      Prices come down with deflation. RBA has a target of 2-3% inflation.

    • intelseb on 07/07/2022 - 10:52
      +1

      recessions are also scare mongered, it is just two consecutive quarters of negative growth in real GDP. Which can be very minuscule, you cant expect economies to grow and grow and grow. so if you have two quarters of -0.01% growth the media will paint doom and gloom.

      • lamparnon77 on 10/07/2022 - 20:50

        Good point. Do you think that the very perception of a possible recession helps create one?

        • intelseb on 16/07/2022 - 13:23
          +1

          Probably, people end up spending less and inherently less money moves throughout the economy etc.

    • postform on 07/07/2022 - 13:18
      +1

      Excellent explanation

      To add to this which is more specific to Australia - Interest rates affect demand for our currency, simply increase rate increases your currency's demand which makes it more valuable in comparison to other currencies i.e. AUD/USD.

      Why this is important is because we are primarily importer of everything (We don't produce anything other than raw materials).

      Real life example - fuel. Fuel kept going up during the last month even though 1, tax exercise was slashed by half and 2, the wholesale oil prices were stable - yet the prices creeped to $2 - this was because if you look during the same period our currency had dropped due to US Feds increasing interest rates and our RBA had not hiked at a similar rate, reducing demand for our currency and increase demand for US which dropped our foreign exchange rate.

      Note: Everything is traded in USD in the international markets, hence why exchange rates are really important.

      Disclaimer: Understanding the nuance of why inflation happens is very complex. All these factors are general overviews. If we were to take fuel in account - there are LOTS of other factors I didn't cover here - that I elaborate on if you like.

  • kipps on 05/07/2022 - 14:27
    +38

    This video is helpful - https://youtube.com/watch?v=PHe0bXAIuk0

    • arkie0 on 05/07/2022 - 16:01
      +3

      Second this video, pretty much sums it up.

    • Trying2SaveABuck on 05/07/2022 - 21:28

      just gave it a watch i think everyone should watch it as most people dont understand basic economics

    • dharmesht on 05/07/2022 - 23:07
      +1

      I was going to share this. You beat me by 40 minutes. lol. Very good video. Actually everyone should watch this.

    • Munki on 06/07/2022 - 11:20
      +2

      Great video. So easy to follow and just explained really well.

    • WebSurfer on 07/07/2022 - 14:41

      Great video. Thanks for sharing.

    • Smol Cat on 07/07/2022 - 16:35

      So is the economy deleveraging and we're all about to be butt f#$kd?? How to tell from the short term debt cycle vs doom and gloom?

      • ALesha77 on 08/07/2022 - 20:11
        +1

        Not necessarily right now. If the government will decide to go with fiscal splash, we could limp on for a few years but that will only make the fall much more painful.

        COVID was an amazing opportunity to deleverage and re-start world economy. Too bad it did coincide with a coming election cycle in US, Europe and politicians chickened out and papered over cracks yet one more time. And it was one more time too much - inflation is here. And I warned you 7 months ago.

    • Toffees on 08/07/2022 - 18:56
      +1

      Further to Ray Dalio's videos, I would recommend reading/listening to Lyn Alden

      here's an article of hers on inflation: https://www.lynalden.com/inflation/

      • ALesha77 on 08/07/2022 - 20:07
        +1

        +1

        Lyn is very good and truly studied the history and data.

    • ALesha77 on 08/07/2022 - 20:05

      Wow! People on this forum watch Ray… did not expect to see that.

      Jokes aside - this is the best starter in getting to understand economic quads and how inflation, growth and policy-making impact your living standards.

      If you want to go further google for my good friend Darius Dale @ 42 Macro - he is not so generous as Ray with giving away his models but he shares some free stuff that is more advanced than Ray's "machine".

  • StrayfireX on 05/07/2022 - 14:28

    If the price of everything goes down (deflation) then everyone will hold onto their money and not spend money. This means fewer jobs because businesses can't afford to employ people. There is much less money going around. You end up with a depression.

    If the price of everything goes up too quickly (hyper-inflation) then money becomes worthless, we end up with 5 trillion dollar notes a la post WW1 Germany, Zimbabwe etc. That is when there is too much money going around.

    The idea is to use higher interest rates to reduce the amount of inflation to an acceptable amount to avoid hyper inflation. It reduces the amount of money going around, thus cooling inflation and stopping hyper inflation (in theory). That is the role of the reserve bank.

    • NigelPearson on 06/07/2022 - 18:23

      Deflation? I've never seen it, but as a consumer, I would buy more food, machinery, luxury cars!

      Businesses (or real estate traders) would hold onto their assets, but they can't do that forever.

    • serpserpserp on 06/07/2022 - 19:09
      +1

      Deflation the the end result, not the driver of economic downturn.

      The problem in the world at the moment is that we really have supply chain inflation. So things are costing more because they can't produce them fast enough, or inputs cost to much to make the product or ship it to market. So interest rates will cause consumption to go down on a lot of these items, then with more stock on hand the prices should go down. But there is a lot of pent up demand that needs to be unwound, so you have to raise rates dramatically to get a fast effect. A lot of large corporates are still going to fund building factories and support businesses through a downturn because their balance sheets are still in good shape. So that demand needs to be worked through first before we see a massive downturn.

  • Drakesy on 05/07/2022 - 14:30
    +59

    Main Driver isn't really the war, it's more like a compounding driver.

    The primary driver was the $750 billion we printed over covid.

    When you manufacture that much money it devalues everything by the equivalent amount - hence inflation.

    The inflation will continue as long as people have access to easy money, by increasing interest rates and thus mortgage repayments you can de-fuel the economy fire.
    Although to really have an impact rates will need to be double what they are today.

    • Richmond Tigers on 05/07/2022 - 14:36
      +2

      So assuming rates get doubled, how will it impact if fuel is still expensive and is used as the means to jack up prices of everything?

      What sort of things in the current climate would deflate should interest rate rises have the desired effect?

      • Drakesy on 05/07/2022 - 14:41
        +7

        Its more runaway inflation, yes fuel is expensive but people will pay what they think something is worth.

        At the moment it's coming from both directions -

        Prices going up because people are flush with cash
        Prices are going up because of worldwide factors.

        The RBA were hoping that it was a temporary inflation jump as a direct result of supply chain shortages etc. Only thing was it wasn't and they missed their initial opportunity. Now they're hitting mortgage holders where it hurts and they're playing catchup with massive hikes that could plunge Australia into a dark recession.

        Basically the less money in the system, the lower the inflation. I don't think it'll deflate more plateau, but given how easy it was to take on debt prior to this there is a tonne of money floating around that people can't afford.

        • PopCounty on 06/07/2022 - 08:24
          +6

          Frankly the RBA boss here just looks like he’s watching the world and follow suit. Doesn’t has his own brain/analysis. I mean WTF he’s AU boss for? Just to increase or lower the interest rates. Is that it?
          His statements are no where confident enough to suggest or build confidence into Australians should there be recession.

          Dr. Raghuram Rajan’e blogs are way more insightful and accurate than our Governor.

          • cafeman on 06/07/2022 - 15:01

            @PopCounty: Our measures of inflation have been lagging the US and EU. If the RBA increases the central rate in lock-step with the US and EU, we're actually acting earlier than they did.

            The RBA also has very limited scope for taking action. They're only supposed to target inflation, even though rate changes affect the exchange rate as well as downstream economic growth. It's the responsibility of government to use fiscal policy and ensure economic growth, not the RBA. Beating them up for doing their job as their job is defined is neither constructive nor informed.

            • PopCounty on 06/07/2022 - 17:27

              @cafeman: Not denying what you said. But hv a look:

              https://youtu.be/R9OYjXC_zXA

              Sure there has been war since and so this statement isn’t truly accurate. Leaving war impact aside, what on earth is this statement about. And that’s my point. He’s Governor and has way more information than most of the Australians.
              In true sense, looking back, his statement also contributed to inflation. Giving ‘false’ confidence amongst ppl.

          • NigelPearson on 06/07/2022 - 18:19

            @PopCounty: If Australia doesn't follow suit, what will happen to our money, and balance of trade?

            e.g. if US interest rate jumped to 20% tomorrow, and Aus'z stayed around 3%?
            US investors would sell everything they have in Aus., because it is not earning!
            (and Aus. investors would move everything into US cash etc to get better interest)

            • PopCounty on 06/07/2022 - 19:16
              +1

              @NigelPearson: Following suit is necessity as we are in web of economy. But only following suit isn’t healthy.
              Also, I said looks like he doesn’t provide confidence amongst Australian should there be recession. And the above YouTube link is enough to prove it right.

              When in dire situation like we are going to be, we would look up to our leaders. As far as I can see, we should embrace for a hit. Captains just gonna increase/decrease s**t.

      • Hearthstone on 05/07/2022 - 14:45
        +1

        No one knows but RBA only has 1 tool in their tool box and that is rate control and that the only tool in your box that the only tool you can use
        some business will goes bust, some people will lose job but they save the majority of the economy and that the role of the RBA.

        They don't look at micro because some business or family face hardship they look at the macro level.
        just like stimulus hand out, some businesses don't need them but they need a wide blanket that will cover the majority of the economy

        • serpserpserp on 06/07/2022 - 19:12

          They have a couple of tools: jawboning, bond market intervention, print money (or take it out of circulation) and interest rate levers.

    • Binchicken22 on 05/07/2022 - 18:19
      +4

      Yep exactly, there are 'consequences' for extreme government spending which everyone seems to call for constantly.

    • tonka on 05/07/2022 - 18:44

      But what is the point of, basically using inflation to avoid a recession, if you want to then cause a recession to reverse it. Seems to me you've gotta be prepared to swallow that inflationary hit as a consequence, not freak out when it catches up to you.

    • [Deactivated] on 06/07/2022 - 19:54
      +1

      This is true. But to add to that is also that people has been hoarding their cash until 2020 when interest just too low to ignore, that's when people spend n borrow more.

      That is why interest rate keeps dropping before covid with no effect because people are hoarding their cash.

  • Hearthstone on 05/07/2022 - 14:38
    +10

    recession is necessary and it will happen it not a matter of if it when, so be prepared for them

    look at how many times recession and depression the American has, plenty of it and their economy is still a power house because recession is necessary for a
    vibrant economy, it forces business and people to better deploy their capital.

    you wouldn't want all the crypto bro to deploy capital into useless mining rigs and consume huge amounts of electricity that could be better used for heating or
    producing durable goods so at some stage these guys will get wiped out and the Apple and the Google and the Amazon will live on through better deployment of capital

    • spackbace on 05/07/2022 - 14:47
      +27

      Though housing affordability was easier, despite the interest rate…

    • SBOB on 05/07/2022 - 14:55
      +14

      pointless comparing interest rates without comparing actual housing affordability at the time (housing prices, ratio of housing cost to income etc)

      In all measurable comparisons housing affordability is generally harder/worse off now, even with sub 3% interest rates

      • jellykingdom on 05/07/2022 - 15:08
        +9

        Well lucky us get the worst of both worlds now haha. Skyrocketing rates AND high house prices. Huzzah

    • zoombie on 05/07/2022 - 15:12
      +5

      The boomers really need to stop flogging this dead horse. Yes, interest rate was 17% but for how long? If you bought a house at it's peak of 17% in 1989, by 1995 interest has dropped down to a much more manageable of 6%. The millennial might buy it 2 or 3% but as recent events have shown, this rate will be gone in no time. Meanwhile, house prices of 1989s to now are not even comparable.

      • BandB on 05/07/2022 - 15:33
        -3

        Back in March 1990, the standard variable rate may have been 17 percent and the average mortgage was $71,000. Average weekly earnings of $523.60 for an average annual salary of $27,227, in 1990 mortgage payments made up 44.99 percent of income.14 Aug 2007. We had a $138,000 mortgage.

        Average weekly wage in 2021 was $1,200

        • zoombie on 05/07/2022 - 16:23
          +9

          What is your point with the above data? So 1990 mortgage payments made up 44.99 percent of income, what is it by 1995? My point is that the older generation keep pointing out the fact that they have to pay 17% interest but its transitional. The economy was going a bad phase at the time, some drastic action was taken and by 1995, interest rate was much more normalise.

          The younger generation on the other hand, are stuck with a $1m plus house prices. There's nothing transitional about these crazy house prices.

          • Quantumcat on 05/07/2022 - 17:12
            +8

            @zoombie: Good point, they took out mortgages with affordability geared towards 17% interest, but then the interest rate decreased and they still have a cheap mortgage. Whereas people now have mortgages with affordability geared towards maybe 4% interest, now they might end up on 10% interest but still a giant mortgage for the next 30 years.

            • Smol Cat on 07/07/2022 - 17:21
              +1

              @Quantumcat: Yes this is us, just was barely able to buy 4 years ago after heavy saving and now look at this fiasco. Thanks Boomers.

        • Trying2SaveABuck on 06/07/2022 - 12:57
          +1

          Back in March 1990, the standard variable rate may have been 17 percent and the average mortgage was $71,000. Average weekly earnings of $523.60 for an average annual salary of $27,227, in 1990 mortgage payments made up 44.99 percent of income.14 Aug 2007. We had a $138,000 mortgage.
          Average weekly wage in 2021 was $1,200

          this argument it was 17% is the dumbest argument and i read it from morons everywhere.

          average house price in 1990 was 77k and average wage was 28k thus you could theoretically save for 3-4 years and buy a house out right on the 'mean' income esp if you had two people working in a house hold. You cannot do that today in any major city esp not Melbourne and Sydney to compare what people are currently dealing with now to back then is so short sighted.

          fact is everything else was probably more expensive for Boomers ie Cars were almost as expensive as cheap houses in the 90s also had a lot less crap coming from china so computers, cloths etc were at premium price - this didnt really change until the internet took off and Australians realised in the early-mid 2000s we were getting ripped off for everything and we started importing everything for 1/3rd of the cost.

          • tonka on 06/07/2022 - 22:20
            +1

            @Trying2SaveABuck: Just here to call you out for name calling. If you need to be combative trash talk go to fortnite.

    • Drakesy on 05/07/2022 - 15:18
      +4

      The disposable income to debt ratio was much better even with 17% interest.
      I feel this is where the argument breaks down.
      This chart sums it up well.

      It's a lot easier to stomach a mortgage that totals 30% of your disposable income.
      As opposed to a mortgage that totals 120% of your disposable income

    • coffeeinmyveins on 05/07/2022 - 22:52
      +6

      Haha found the boomer

      You do realise that your "17 percent interest rate" (which was probably lower in reality) was on a property 5 times the annual salary.

      Now they are ten times that. Guess what isn't ten times as much? Wages

    • Mr Haj on 06/07/2022 - 13:41
      +1

      My family relied on only one income which was sufficient to purchase a house (in Melbourne!) and support five family members. My dad was not a high income earner; he has no formal qualifications and received no money from his parents.

      Now give me an example today where someone without any qualifications has purchased a house without any support from their parents on one income and can raise a family of five.

      • Poor Ass on 06/07/2022 - 22:54
        +2

        traffic controller lol

      • tonka on 06/07/2022 - 23:22
        -4

        Still happens, still people working hard, earning some OT and living in affordable areas. So many of the complaints I see, people have a good long whine, then you find out they are insisting on a newly renovated house in Sydney inner suburbs. There's single income families in Sydneys SW that seem to need 5, 6 or 7 kids.

    • [Deactivated] on 07/07/2022 - 11:30

      My parents bought their house in the early 00s for 195k and houses in the area go for nearly 1 million.

      You can't compare those times.

  • freefall101 on 05/07/2022 - 14:50

    It's a sledgehammer but it's the only tool in place to do anything about it. They're using it gently via small rate rises but it's still impossible to use well.

    But with the main driver of this inflation being overseas war, does an interest rate hike actually achieve anything by ways of lowering the price of goods and services?

    The RBA doesn't want to lower the price of goods and services, they just want to slow inflation. Remember, inflation is the growth in the cost of stuff, not the price. So at this point if prices are 2% higher a year from now then that's good. A wide ranging drop in prices would actually be bad. Employee wages have all shot up so companies would need to find more efficiencies and get rid of a lot of staff to combat it because pushing wages back down again is very hard.

    Interest rate rises will slow price increases, because people simply won't be able to afford some stuff, rather than throwing the growing pile of money at it. The goal isn't to fix supply, which as you note is out of control, it's to fix demand. If people don't have the money to buy stuff, or have incentives to invest, they will literally buy less stuff.

    Is it a good thing for the economy? The whole point of stimulus in the past was to pump more money into the economy to prop up business, does keeping money in bank accounts benefit business? Will inflation stop people from buying higher end products and see businesses and brands go belly up? Will the government have to do something stupid like allow people to take out super because of public outcry about people struggling?

    Some products will not perform as well, some businesses will likely go bust, economic growth will suffer. Why? Because the alternative is far, far worse. Hyperinflation.

    When supply is limited and demand is outstripping it, throwing more money at the problem just results in more inflation. People will bitch and moan, for sure, they will call for super releases but that's just moronic. So would the government borrowing money to give to people at random. Some people will probably lose their homes.

    The more we do to try support people though, the more it extends inflation. Remember, there's a shortage of all kinds of stuff. The more money you give people the more the price of stuff will just keep going up in a supply constrained situation. Which will push up wages, which will push up costs, which will push up wages, etc, etc.

    The RBA doesn't have target economic growth, they only have target inflation, which is to make the ups and downs smoother.

  • iDroid on 05/07/2022 - 14:56
    +6

    It's just part of a manufactured economic cycle. Governments need inflation to ensure the workers' savings are eventually worthless. This is required to ensure the next generation also need to work (can't live off the previous generation's earnings/savings).

    It's by design, not a flaw.

    So the system is designed to cause inflation but inflation can run wild (or not at all) so interest rates are used to drive inflation one way or another.

    Interest rates are the tool of choice since it's at the heart of the money supply.

    Interest rates affect the workers directly through cost of living (you gotta have a place to live in). So regardless of your stance you must participate in this interest rate inflation driving game - you're forced to by paying for a mortgage or paying rent (to the mortgage payer).

    But it would seem that they have opened the taps to high and for too long (low interest rate = cheap money supply == high inflation). Interest rates at near zero is an obvious red flag that things have gone too far - money is sooooo cheap at this stage avoiding hyperinflation is a job in itself.

    We're seeing a taste of hyperinflation (we're not there yet, but it's a taste of what it's like).

    Interest rates will increase and will eventually reduce/slow inflation and then they'll start the cycle all over again.

    • JSONBourne on 06/07/2022 - 09:27
      +3

      Inflation is nothing to do with destroying the next generation, it’s to induce economic demand.

      Those who have retirement wealth would hopefully have their money in assets generating returns above inflation anyway.

  • CyberMurning on 05/07/2022 - 15:06
    +6

    I Need an Idiots Guide

    replace lettuce with cabbage

    • EightImmortals on 05/07/2022 - 16:27
      +3

      And steak with bugs.

      • iDroid on 05/07/2022 - 21:02
        +1

        Moreton Bay bugs with herb and garlic butter is pretty damn good though.

  • John Kimble on 05/07/2022 - 15:09
    +1

    Bah, been meaning to look into fixing my home loan rate for the last 6 to 12 months…now I assume it's too late 😔

    • Richmond Tigers on 05/07/2022 - 15:15
      +12

      I'm an idiot when it comes to that stuff, but last year I refinanced at 2.4% for 5 years and people thought I was daft at not taking 1.8% at 2 years.

      Now I look like a freaking financial messiah (when clearly by this thread I'm not).

      • Donaldhump on 05/07/2022 - 15:16
        +1

        you did well, i took a punt and removed money from offset and made fixed at 2.19 for 4 years, and put in shares.
        i might move some out into TD's at 3.5% should cover it now, and maybe next year the TD's are 4.5%

      • John Kimble on 05/07/2022 - 15:18
        +8

        Mate, you probably are! 👍💪

        You're likely to save thousands a year…meanwhile I'm scrounging for $5 bonus cashbacks and Amazon promo credit here and there…time I should have spent looking into refinancing 😭

        • IM-Cheap on 06/07/2022 - 07:47
          +2

          Can still refinance or call the bank for a better variable deal. Might be too late to get a decent fixed (depending on if you believe the forecast) but if you are not getting the best variable rate possible right now 30mins research and a 15min call to the bank can save serious $ for the time investment.

          • John Kimble on 06/07/2022 - 08:25

            @IM-Cheap: Yep, will be calling them today.

          • John Kimble on 06/07/2022 - 15:01

            @IM-Cheap: So I could only get a discount from 3.44% to 2.89%, but if they pass on the rate increase in the next few days/weeks (which is likely), I'll be almost back to square one (3.39%)

            Perhaps time to refinance with another institution to take advantage of a lower rate + ~$3k cashback…

            • IM-Cheap on 07/07/2022 - 12:32
              +2

              @John Kimble: But if you hadn't you'd likely be at 3.94% next month so still abit of a win. Never hurts to shop around - I always have another bank's advertised offer on hand (being sure I qualify for the rate ie. its only available to <80% LVR) and ready to fill out if they say no to matching it.

      • FoxJump on 05/07/2022 - 16:51

        i'm an idiot for allowing my mortgage broker to convince me to 1.89 for 2 years instead of 1.99 for 4 :|

        • Blitzfx on 06/07/2022 - 00:15

          Dam, that's rough for 0.1%.

        • Richmond Tigers on 06/07/2022 - 10:36

          I refinanced myself, had a broker to get my original Mortgage and the 2 year deal was their offer when it came time to refinance with no option to chuck on an extra bit of money (kids needed braces). I told them politely to delete my contact details from my phone.

          • FoxJump on 07/07/2022 - 10:31
            +4

            @Richmond Tigers: Wow. How did they delete your contact details from your phone!

            Hehe

      • Third_Gear on 05/07/2022 - 22:57
        +2

        Well done! 1.95% for 5 years here. 4 more to go!! It was easy to see interest rates would start going up though….

        • SgtBatten on 06/07/2022 - 13:10

          Where did you get 5 year fixed rate that low 12 months ago? best i got was 3.

        • virhlpool on 07/07/2022 - 16:56

          P&I or Interest only?

      • virhlpool on 07/07/2022 - 16:57

        Was it P&I or Interest only? It's an important factor too. Good on ya if it was P&I.

        • Third_Gear on 08/07/2022 - 18:25

          P&I with an offset account. I feel like I just got really lucky as I renewed it online through their automated system. As soon as I saw the offer I just accepted right away.

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