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

          • virhlpool on 08/07/2022 - 20:43

            @Third_Gear: Interesting.. which bank was it? I didn't know you can renew your fixed loans online.

    • iDroid on 05/07/2022 - 21:16
      +1

      I don't have my own opinion on this but a fellow OzBargain member recently made a rather compelling argument why choosing a fixed rate over a variable rate is usually not the best choice (obviously not in all cases as in your specific case - maybe).

      This is the relevant post about the fixed rate being the bank's hedge against the variable rate.

  • JimmyF on 05/07/2022 - 15:16
    +11

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

    I think you'll find it is way more than just this.

    Crops have been wiped out in recent floods, hence $12 lettuce.

    Shipping costs are up 10 fold from pre covid even before the war.

    Lots of smaller companies had to ride out 1-2 years of bad profits, piling up debt to stay afloat and are now jacking up prices to cover this debt.

    People borrowing crazy amounts to buy houses as 'debt' is cheap.

    We have entered a perfect storm of events. The last gov screwed it over by dropping rates to the floor AND pumping money in like no tomorrow. Shouldn't have done both.

  • core101 on 05/07/2022 - 16:31
    +4

    For those living under a rock, WEF have been pushing the Great Reset, where you will own nothing, except Metaverse property, eat bugs, and be happy.'
    Interest rates are up .5%, and state leaders have agreed to change definition of fully v*d to now be booster 4, let the next round begin.

  • BewareOfThe Dog on 05/07/2022 - 17:29
    +1

    This should Help

  • cannedhams on 05/07/2022 - 17:46
    +6

    Gday OP,

    There's an old saying: "whether you win or you lose isn't something you choose". The RBA doesnt really "control" the economy. Its role is limited to monetary policy. For that to be successful, economic conditions need to be kept within a fairly tight range.

    Any central banker needs to nip runaway inflation in the bud. The central bank in Turkey decided to cut rates a couple of years back when inflation picked up, the end result is that inflation is now running at 80%, the central bank has lost all control, and there is a loss of overall confidence in the currency.

    For that reason, if inflation picks up, the central bank must hike to keep pace with it.

    If they don't:-

    a) no one will want to keep an asset (ie currency) which is providing no returns (ie, interest) but whose value is being eaten away due to inflation. It basically amounts to sitting on a steadily devaluing asset. So they will just dump it instead. Depositors and anyone else with assets denominated in that currency will simply sell it it and try and buy something else.
    b) This adds to the pile of unwanted currency sloshing around and basically precipitates what is called an inflationary spiral - the currency is unloved, so people dump it, the more sellers there are for currency and the fewer buyers, the more worthless the currency becomes, meaning its worth is eroded more - its basically a rush for the exit
    c) the local currency collapses relative to overseas currencies as they become more attractive, either because they do pay interest or because the market smells blood. This means imports become more expensive in the local currency, meaning inflation picks up more
    c) eventually shops stop accepting the currency and ask to be paid in euros or USD instead. A black market develops whereby the state tries, usually unsuccessfully, to force retailers to keep accepting the currency. This is where you see Weimar-era photos of people using money bills as wallpaper because it essentially has no other utility. This is hyperinflation, and there is no turning back. At that point there is no solution short of hitting the reset button.

  • capslock on 05/07/2022 - 17:57
    +6

    The war is not the only reason there is inflation.

    People took out huge bank loans. The government gave out heaps of money. There is so much money floating around that people everywhere are spending big on everything.

  • tonka on 05/07/2022 - 18:00
    +1

    I am wondering the same. If it's not discretionary spending causing inflation then squeezing discretionary spending will just cost jobs and also maybe increase inflation more. I think the existing goals are out of touch with modern economics. And also they have not considered how service based our current environment now is, so how much of an immediate effect killing discretionary spending will have on lower paid jobs.

    • Richmond Tigers on 06/07/2022 - 10:44

      Like someone said above, inflation is meant to reset prices by forcing business to lower prices to trigger discretionary spending. But as you point out if businesses are to maintain a profit margin but by selling cheaper items, its the employee who will be expendable.

  • tonka on 05/07/2022 - 18:02
    +7

    I wouldn't mind a consumer strike, where only big business is targeted , and let that fix inflation. Maybe start with Gerry.

    • JSONBourne on 06/07/2022 - 09:29

      Ironically that’s what raising rates does. It flattens demand.

      • tonka on 06/07/2022 - 12:34

        That's why I specified big business.

  • brendanm on 05/07/2022 - 18:41
    +7

    It has not gone up because of war. It has gone up because the government has been throwing money at people for years now due to covid. On top of that, there have been shortages for years, caused by supply chain interruptions due to covid. This war stuff is just the icing on the cake.

    • Michael1983 on 06/07/2022 - 10:40

      Yep true, so much money was handed out. My friends partner was and still on jobseeker payment and she bought brand new iphone 13 pro (or whichever is latest) recently. I worked and still work full-time having old shitty huawei nova from 2018. No support from government whatsorever.

  • FujiFruit on 05/07/2022 - 18:46

    So what would the bank savings interest be? How high would it go now?

    • Zythyx on 07/07/2022 - 08:13

      In the 80's, interest rates were about 16%, no idea if we'd ever see that much ever again, but it's not unprecedented

  • JIMB0 on 05/07/2022 - 19:03
    +5

    There is too much demand for goods and services (thanks to cheap/free money, ie. government handouts, money printing) at a time when there is not enough supply (due to covid, then the war). The RBA is trying to reduce demand by taking some of this excess money away via higher interest rates. This should also help on the supply side by forcing people out to work who may not otherwise work.

  • MrCAMEL on 05/07/2022 - 21:39
    +1

    Yeah Mr Richmond Tigers, doesn't make sense. Look at the things that have gone up a lot. Fuel, energy, fruit and vegetables (partly seasonal), milk, bread. Someone here commented, now they have less money to spend on fuel and electricity. Is that what the desired effect is?

    Take a stroll through Kmart, Myer, JB Hi Fi. Plates, microwaves, TVs, shirts, socks, perfumes, whatever, all seem to be cheaper or the same price they were many years ago.
    Is it because of people are spending on unnecessaries that make the essentials go up? Or is that part of the scam?
    It's all a rort. Remember, this reserve bank boss clown, just a few months ago said rates wouldn't rise for 2 more years. I assume this guy is supposed to be the smartest guy out there in relation to these matters. He's making it up a he goes along.

    • jellykingdom on 07/07/2022 - 10:38
      +2

      Yknow that's an interesting observation. NON essentials have all gotten cheaper (either literally or in real value terms, i.e price didn't change so effectively theyre cheaper) over previous years. Essentials have all gone up.

      Man i have no idea how the Reserve Bank see this playing out. If they want people to stop spending, this is a good way to do it. Scare the pants off everyone/make them all broke

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

      This is the dirty little secret. Price of essential commodities has been steadily rising for quite some time. The only thing keeping inflation flat all the while was decreases in value added goods from China.

      Those decreases are playing out, as there is a limit to even China's ability to manufacture stuff cheaply. The increases are set to continue.

  • rogerwilko on 05/07/2022 - 22:04

    Still don't get it. Does this have something to do with the Matrix.

    Unfortunately, no one can be told what the Matrix really is. You have to see it for yourself.

  • MuddyClear on 05/07/2022 - 22:08
    +9

    The liberal government have a lot to answer for with the builders grant inflating cost of materials and labour, which in turn inflated housing prices, compounding housing crisis in Australia, and contributed to overall inflation in Australia.

    The liberal government also soured relations with China resulting in sanctions from them, which also contributed to inflation.

  • CuteWittleCorgi on 05/07/2022 - 22:12
    +1

    Just paying more in interest to the banks in my mortgage. Not really reducing spending anywhere else. I don’t get it either.

    Australia should just go into lockdown again. That’ll cool down the economy.

    • Hearthstone on 05/07/2022 - 22:39
      +6

      If you have $100 income each month and it used to cost you $10 to service your mortage, you got $90 left to spend

      if now you are paying $15 to service your debt, you only have $85 left to spend so that effectively cut your money supplies by
      $5 and you have $5 less to spend, you have to cut back on coffee or buying cheaper meat or don't go to the movies etc…

      That is exactly what they are trying to achieve.

      • rogerwilko on 05/07/2022 - 22:48

        Silly question, who gets the 5 bucks? The banks or the government?

        • Hearthstone on 05/07/2022 - 22:58
          +8

          your $5 will get cancel on the bank's balance sheet of asset and liability so there will be $5 less in the economy, $5 less credit, less credit, less spending, less spending, lead to less demand, less demand leads to lower price

          When you borrow money to buy a house, you borrow money from the banks, banks book your house as an asset and your
          borrowing is a liability and the contract exchange and credit is created.

          Any extra money you pay back to the banks will keep the balance on this asset and liability book, the more debt you pay back the less credit is available
          and trying to reduce credit and demand is what they want

          • rogerwilko on 05/07/2022 - 23:37

            @Hearthstone: Thank you makes sense.

            I suppose my concern would be that we start pushing current issues aside as the focus is all about living costs.

          • El-Rhi on 06/07/2022 - 06:42

            @Hearthstone:

            When you borrow money to buy a house, you borrow money from the banks, banks book your house as an asset and your
            borrowing is a liability and the contract exchange and credit is created.

            Looks like someone failed Accounting 101

            • Hearthstone on 06/07/2022 - 06:47

              @El-Rhi: Please explain your correct answer? I invest in bank stock so I know a bit about how banking works and how they book assets and liability

              • El-Rhi on 06/07/2022 - 06:52
                +2

                @Hearthstone: From the banks point of view, the asset is the loan balance and the liability is the source of bank funding. Banks do not book your house as an asset, they take it as collateral, which isn’t on their balance sheet.

                From the borrowers point of view, the asset is the property and the liability is the loan balance.

                • Hearthstone on 06/07/2022 - 06:55

                  @El-Rhi: but if the borrower doesn't pay back that becomes bank liability so the only asset, they can book is someone else's house
                  the customer owned nothing until the debt is paid off and settled or until they liquidates the house and get their cash differences
                  in the mean time, it all banks asset and liability

                  • serpserpserp on 06/07/2022 - 19:36
                    +1

                    @Hearthstone:

                    but if the borrower doesn't pay back that becomes bank liability so the only asset, they can book is someone else's house

                    A distressed loan becomes a liability on the balance sheet as they'll make a provision for it. However the house itself will be liquidated quickly by a third party and the proceeds received will reduce the banks asset (being the mortgagee loan) then the provision gets reduced accordingly.

                    So in the real world, the house never ends up on the banks balance sheet. BUT to play devil's advocate, what happens in an illiquid property market where you can't sell a property for years? Not sure if they then take possession and land titles etc go in the banks name? Not sure how long you can have a provision for.

                    • Hearthstone on 06/07/2022 - 22:27

                      @serpserpserp: ok we probably understood the concept but explained it differently, so when banks lend you the money, the loan is an asset for the banks but there is no guaranteed for them to get back that loan back so they take your properties as collateral.

                      even though it may not show up on the bank's balance sheet as an asset, it technically owns that asset as the electronic copy of the title deed has the bank name interest on it and should you default on your loan it can start the repossession process.

                      If the house is empty, they can just walk up to it, change the lock and start selling it without consulting you
                      If it is not vacant, they need to go to court but essentially, they are on the title deed and can do whatever they want

                      Until you pay out your loan and the title get transferred under your name, that asset is under bank control.

                      I said the loan is a liability to bank because loan can get default and it becomes a liability, whereas the properties is in their name on the title deed
                      is an asset as no one can touch it or sell it except the banks.

                      but I am ok with your explanation as well

          • JSONBourne on 06/07/2022 - 09:30

            @Hearthstone: Thanks for your great work in this thread across all your answers

        • MrCAMEL on 06/07/2022 - 07:34

          What is the mechanism that allows a central bank to say, hey today it costs more to have debt? Why should this affect loans that were funded 10 years ago, for example? Surely the deal is done and the bank and customer were happy at the time.
          Is this a modern thing?
          What if everyone, every person, bank, business and government said the cost of everything and income of everyone is reducing by 5%? Would that control things?
          What if there wasn't a reserve bank that had a say in the cost of debt? What would the economy do?

          The extra money has to go somewhere. It doesn't just 'cancel' I guess that's why there is a massive growing gap between rich and not so rich is the world!

          I got a brand new gas ducted heating system installed last week and the gas guy said the whole issue with gas and made up problems with supply is the biggest scam ever. He said gas should be free here with the amount we have. I know nothing about that, but I don't see why I shouldn't believe him. Seems like this is true for every industry these days.

          • rogerwilko on 06/07/2022 - 17:56

            @MrCAMEL:

            What if everyone, every person, bank, business and government said the cost of everything and income of everyone is reducing by 5%? Would that control things?

            I thought the same but assumed they designed the current system to target the middle class

            • MrCAMEL on 06/07/2022 - 19:00

              @rogerwilko: Well that's right, because if everything did evenly 'drop', it would achieve nothing. It would be the same as now, except with different numbers. We'd be where we are now. So, by the theory, the aim really is to make some people worse off for the better of the people that won't care about what's happening- the already rich- probably.

              • rogerwilko on 07/07/2022 - 00:52

                @MrCAMEL: So owner occupiers with a mortgage have to accept the increase in rates. However if you have rental property you can hope to pass the increase onto your tenants.

                • tonka on 07/07/2022 - 08:15

                  @rogerwilko: Not always. I have a very cheap unit in Sydney, my first home I bought. Which I'm about to just lock up empty because I can't afford to rent it out. Will cost me more in maint than I will get in rent.

  • Vote for Pedro on 05/07/2022 - 22:47

    @rektrading 🫰📈🤡

  • outlander on 05/07/2022 - 23:24
    +1

    Some of it's real problems, like the war and supply disruptions, but a lot of it is just made up. When people have an excuse that justifies bad actions, they tend to do those bad actions.

    Remember the 'carbon tax'? The real impact was an increase to costs of like 1%, but many businesses increased prices by as much as 20% in response, just because they knew that people would accept it without blaming them.

    Also factor in that we are a small market relative to the global market. Australians can all decide they don't want gold, and all rush to sell every piece of gold jewellery they have, but given that Australia is 1/15 of the population of USA alone.. gold isn't going to suddenly drop to nothing. So supply/demand effects based on our choices are limited

  • nobro25 on 06/07/2022 - 00:32
    +1

    There's a few problems here with this scenario that we're in right now.

    1. Rising inflation, but that's due to scarcity of foods and the backlog of logistics and transport. This will have compounding effect over the years until we have ample supply.

    2. If people start spending less? What does this actually mean? Less holidays, buying the cheaper brands, not going out? Is that what the RBA wants and is that really going to happen? Put it this way if price of produce went double the amount this has an affect on the restaurant and they'll pass it on to the consumers. But if less people are spending the restaurant is not making a profit anyway. They're not gonna sell at a loss.

    3. If people all jump ship just to buy the cheaper brands and compounded with lack of stock wouldn't that drive up the prices of those stock regardless of how high the RBA pushes the interest. People still have to buy essential items. If RBA pushes up the rates then rent for businesses goes up… Guess what theyll have to raise prices to match their profits.

    4. Mortgage rises isn't such a bad thing and most people I have been talking about are fine with it as they're negative geared with a few properties. Yes prices have dropped but they're still making a damn good profit on property purchased 5+ years ago.

    The way I see it the prices you see now will never come down and will be the norm. They're just trying to reduce inflation but not 'reverse' inflation. Income will always be behind inflation and until the world supply chain is back to normal everything is going up atleast till mid next year.

    Energy is a mess and won't be solved within the next 10 years atleast.

  • pformag on 06/07/2022 - 02:00

    Cracker Boom.

  • Aerith-Waifu on 06/07/2022 - 04:03
    +2

    Holy crap I was asking the exact question to my wife, however not everyone over spent like crazy, now let me be frank here, since doing UberEats I have had LOTS of orders paying me $8 for delivery with 1 single coke or 1 single ice-cream, now these people are really the reason why the interests rate need to raise, how about to the rest of us who are already tightening their budget by a lot and been really responsible with the money?

    Why are we been punished at the same time?

    RBA is making a huge mistake, mark my words here, they will start cutting soon as this is going to be a recession maker on what they are doing. PL should resign as he failed to act when the inflation is just started to raise.

  • jli789 on 06/07/2022 - 05:57
    +4

    Okay, main driver of the inflation is not the war. It's because almost all countries printed too much money because of covid, and then inject the money into the market as handouts or subsidies, so the economy didn't tank during covid.
    High inflation is bad news, but so is recession. The U.S has gone with the option of suppressing inflation, the rba kind of has to follow suit.
    Remember how much is cash rate ten years ago?

    Anything lower than that won't worry me that much

  • Ade99 on 06/07/2022 - 08:25

    Price of fuel including gas goes up. Gas is required to make fertilizer. Cost of fertilizer goes up by a few hundred % (especially as Russia makes a lot of it!) Cost to grow basic grains goes up. Cost to feed chickens, pigs etc goes up. Cost of basic food goes up in retail. People ask for an above inflation pay rise (like nurses getting 20-30% pay rises in the 1970's)…..rinse and repeat as the cost of items goes up to cover the new wages bill…….

  • MindGrenadius on 06/07/2022 - 09:35
    +1

    There is the impact it has on household spending (higher mortgage and rent = less consumer spending = less demand = lower inflation) but the main impact is the cost of credit and capital.

    When they cut to near zero, investment firms get very, very cheap debt which in turn can fund businesses. If rates go up, the deal is not as attractive as they need more returns to justify the loans which means less investment. It kept things afloat and makes it seem like everything was great again. It's like adding a credit cards balance to your PnL and saying everything is great, and don't worry because profits are x% and everything will stay great so we can pay it back easily. Then you lose your job and you still have the CC debt.

    But what happens is after the investment banks and top of the chain gets the first bite at the apple, all the new loans encouraged by the cheap rates are new money in the system. Inflation actually comes from meaning the inflation of the money supply (its a bit of a devious trick that it's now simply defined as "rising prices"). When the money supply inflates, each dollar is now worth less in the same way 1/10,000 is worth more than 1/1,000,000. By the time it gets to the regular people, it's worth a lot less and everything just gets expensive.

    Central banking is essentially a giant scam. There is an echo throughout history of humanity giving in to the temporary opulence CB can provide, but it comes at a steep cost. This is all a continuation of what began in 1913, got worse in 1971 and is coming to a head now. Prepare for much worse than this! This will be remembered as the good times in comparison to what is coming.

  • qvinto on 06/07/2022 - 10:48
    +4

    Raising interest rates will also further increase the generational wealth divide. Boomers with paid off houses that have increased in value by close to an order of magnitude since purchase 20-30 years ago will not really be affected by rate rises. It is the younger generation that took on large loans just to purchase a home that will bear the brunt of higher living costs and be less well off. The ridiculous housing bubble in Australia has left the younger generation with much less wealth than the generation before. The only offseting factor is if you have boomer parents from which you can inherit real estate wealth. If you don't (due to being a migrant or from a low socio economic family) than bad luck, you will spend most of your life paying off realestate debt to fund the wealth of the older generation.

    • Mr Haj on 06/07/2022 - 13:55
      -1

      Raising interest rates will also further increase the generational wealth divide.

      I couldn't disagree with this any more. Low interest rates inflate the value of assets. Wealthy people have assets. In the past 10 years people's houses have multiplied in value while renters have had to pay more rent.

      Higher interest rates will allow non-home owners to save a deposit faster (thanks to higher interest rates in savings accounts) and push the price of housing down (fingers crossed).

      • MuddyClear on 06/07/2022 - 18:32
        +1

        In the past 10 years people's houses have multiplied in value while renters have had to pay more rent.

        Massive exaggeration.

        Higher interest rates will allow non-home owners to save a deposit faster (thanks to higher interest rates in savings accounts) and push the price of housing down (fingers crossed).

        Although the overall trend should be down in house prices, there will be some popular areas that will continue hold or rise further.

        Higher interest rates also make it harder to secure a loan from the bank and at a lower amount, so it may limit your options. It also makes it harder to service the loan once you get it. So when it comes to property you buy now and not wait around or you will never get on the property ladder.

    • MuddyClear on 06/07/2022 - 18:41

      , you will spend most of your life paying off realestate debt to fund the wealth of the older generation

      Paying off your mortgage does not fund the wealth of the older generation

      And if you’re spending most of your life paying off your mortgage then you’re doing something wrong

      • qvinto on 08/07/2022 - 11:45
        +1

        "Paying off your mortgage does not fund the wealth of the older generation"

        So who are most new families buying established houses from if not an older generation?

        "And if you’re spending most of your life paying off your mortgage then you’re doing something wrong"

        how long would it take the average family on an average income to save a sufficient deposit and pay off an average house in Melbourne (cost ~1M+)?
        ~5 years+ to save a deposit, 30 years to pay off. 35 years is close to most of an average persons working life

        • MuddyClear on 08/07/2022 - 11:56

          So who are most new families buying established houses from if not an older generation?

          Why you assume it’s only younger generation buying older generation homes?

          Young generation today will be old generation tomorrow. And when it’s time for you to sell you will get your money back and then some.

          how long would it take the average family on an average income to save a sufficient deposit and pay off an average house in Melbourne (cost ~1M+)?
          ~5 years+ to save a deposit, 30 years to pay off. 35 years is close to most of an average persons working life

          If you’re just paying the minimum repayments on your mortgage then you are doing something wrong.

          A new couple would take advantage of government grants and purchase a small unit/house to start…

          • qvinto on 08/07/2022 - 12:16

            @MuddyClear: A young family with 2-3 kids really needs a 3-4 bedroom house to have a standard of living comparable to a similar older generation. The averge price for such a house is ~1M in Melbourne. That requires ~200k deposit to buy and leaves an 800k loan.

            To save 200k on an average houshold income requires years of savings. 5 may be an underestimate.

            To pay off an 800k loan with an interest rate of 5% requires 30 years of ~4300 per month repayments.

            The average net household income per month in melbourne is about ~6000-7000. 4300 is >60% of household income, this is not a "minimum repayments scenario".

            The point is that house prices have increased substantially compared to what they were for the older generation (both overall and as percentage of average income). An older generation sitting on a 1M house they bought for 300k (accounted for inflation) has made 700k. That 700k has to come from the new buyer who is most likely a younger generation family

            • MuddyClear on 08/07/2022 - 12:33
              -1

              @qvinto:

              A young family with 2-3 kids really needs a 3-4 bedroom house to have a standard of living comparable to a similar older generation.

              A young couple starts with them living together with zero kids…

              • qvinto on 08/07/2022 - 13:21

                @MuddyClear: So? is that house free? can they swap it for a larger one without paying more? if their first house goes up and they make some money to offset the purchase of the second then who is paying for their firts house profit? an even younger couple. The same pricinple still applies if house prices values are incrreasing at unsustainable levels. Over their life they still need to pay for a 1M house - the majority of that money is going to an older generation who is selling their house.

                If you want to keep playing whataboutism then enjoy yourself. If you have some proper arguments to make then make them

                • MuddyClear on 08/07/2022 - 16:42
                  -2

                  @qvinto:

                  So?

                  So they don’t need to start with a $1 mil house with 3/4 bedrooms like you keep thinking

            • tonka on 08/07/2022 - 18:13
              -2

              @qvinto: I'm gonna suggest, if they want a standard of living comparable to previous generations, shop for themselves at the supermarket, cook their own food and any take out or restaurant food is a rare luxury item, drink coffee and tea they make themselves, mow their own lawn, repair their own clothes when worn, make do with second hand furniture and an older kitchen/bathroom etc. Catch the bus, not uber or taxi, learn to service own car and complete house maintenance and small repairs. Make do with only free to air TV, don't have a TV in every room. Don't have internet, go to library if you need to know something, go the an actual bank if you need a transaction. File your own nails, exercise without a gym, get by with one car, don't have air con, the list really goes on on more. Bit the point is really, there is more to comparing standard of living than just the amount of bedrooms in a house, and in many cases the current generation comes out on top even with a reduced floorspace.

              • SBOB on 08/07/2022 - 18:41

                @tonka: And get off my lawn……

                • tonka on 09/07/2022 - 00:51

                  @SBOB: You don't get what I'm saying. The standard of houses back then, and the quality of living, people today would consider unacceptable. Sure living space was cheaper, but it was also cheaper and required more effort. And while housing may have been cheaper, other things were comparatively more expensive, electronics and white goods in particular. I've got some old Atari cartridges and the original price tag is over $100. I cannot figure out how anyone could afford that, it would be the equivalent of around $1000 today.

              • MuddyClear on 08/07/2022 - 22:26
                -1

                @tonka:

                I'm gonna suggest, if they want a standard of living comparable to previous generations…

                Living in the past is not all it’s cracked up to be.

  • Brianqpr on 06/07/2022 - 11:14
    +1

    In theory it reduces discretionary spending and therefore puts downward pressure on prices. Whether this works when much of the current inflation is caused by external issues is very open to question.

    • fullmetal on 06/07/2022 - 12:40

      Assuming the population is rational.

    • MuddyClear on 09/07/2022 - 11:10
      -1

      It should help but requires aggressive rates hikes to compensate for inflation caused by largely external factors as you mentioned.

  • asCMSas on 06/07/2022 - 11:46

    You are right in understanding that raising interest rates is an imperfect method to slow inflation, and one put at arms length from politicians to reduce public opinion fallout.

    Since you rightly identify the inflation coming from supply constraints, reducing demand will not address the cause of inflation.

    The missing tool is legislation, where governments can put in place super-profit taxes, and penalise large multinationals like petroleum producers for price gouging. This method is not used anymore as it risks future political donations which are needed to keep power.

    One method to get by during inflation is to take on debt early - since inflation will cause the money you owe to be worth less over time.. assuming your wages/income also can keep pace with inflation and repayments.
    Another is to acquire assets that produce income sooner, as they will cost more to buy later.
    Other than that, backyard chickens cant hurt.

    • MuddyClear on 09/07/2022 - 15:01
      -1

      Since you rightly identify the inflation coming from supply constraints, reducing demand will not address the cause of inflation.

      No. Reducing demand will allow supply to catch up, which will slow down inflation.

      One method to get by during inflation is to take on debt early…

      No. Taking in too much debt is part of the problem causing inflation. Now with the rate rises to tackle inflation, people with huge debts are going to be under enormous financial stress.

  • Elfarol on 06/07/2022 - 12:48
    +2

    Great posts here. Just a few additional thoughts (and summary points) with regards the impact of interest rates in the Australian context, and perhaps also why the RBA is raising rates (I’m sorry for not citing sources, but these ideas really just flow from RBA's own published research – which is not necessarily the RBA’s views – as well as other research work – this is brain vomit; so take it as you may):
    - As mentioned, much of the current inflation is driven by the supply side and not by people's suddenly growing demand (i.e. the economy is doing better, though certainly not running 'hot'); this sort of inflation is the sort that the RBA is in a poor position to intervene on. RBA could be worried about ‘inflationary expectations’ beginning to drive inflation; but that is likely a secondary concern that can be overcome if supply side inflation abates (I’m thinking petrol prices in particular).
    - Could the rate rises lead to a consumer led recession? Sure, if a mortgage squeeze precipitates (due to rising rates) and inflation continues unabated. From a rate rise perspective, everyone has a mortgage; the majority of new mortgagees are on fixed rates and won't face the interest rises till late next near (so the RBA 'squeeze' will not be felt till later); and further, mortgagees on average have an 18 month percent buffer on payments. So the rate rises onto existing mortgages will in general be passed on 'softly' with time for the average Joe to prepare financially (though not everyone is in this boat; there is a group of first home buyers on lower incomes and variable rates that will likely suffer significantly; but from the RBAs ‘whole of economy’ view, they are likely a small minority – most new mortgagees are those who kept their jobs through the pandemic). So, the economy wide impact of these hikes will be felt over the next few years and the fast pace of rate hikes will be ‘softened’ in terms of their impact.
    - What about business lending? Australia is somewhat unusual in that business loans are less prevalent than other comparable economies and often provided to low-risk (and sometimes preferentially very low risk) clients (if you have ever applied for a business loan you would know how unwilling banks are to finance business credit). This is because the profitability (vs risk) of these loans have been far outmatched over the past few decades by home loans. In fact, most Australian bank loans are home loans with business loans total only around 20% of Australian bank business by value. While these rate rises will likely curtail business investment going forward (bringing them back to pre-pandemic investment levels, and then also among the high cash-flow businesses that were eligible for these in the first place); they are less likely to push businesses into default.
    - So, inflation aside, the cost of raising rates is quite low for the RBA; and it needs to raise rates, not only because there is inflation, but because rates are too low for the RBA to have a meaningful policy instrument otherwise. Consider this a period of ‘normalization’ and inflation is likely a good enough excuse to do this anyway. Especially while the economy is helped by substantial inflation in commodity prices that Australia exports. There are also good reasons for raising rates, to maintain stability of the currency as other central banks raise their rates. When the economy faces significant headwind from a spending perspective, the RBA will have some dry powder to intervene.
    - House prices are the elephant in the room; it seems (to the RBA among others) that interest rate declines have been a substantial driver of the house price boom (as opposed to housing boom; where appropriate stock lags demand). So, you might expect rate rises to lead to a crash. The experience in New Zealand; which has seen a much more significant house price boom, more significant inflation, and substantially higher rate rises in response; is that prices have retreated in a fairly orderly fashion of around 1% a month. Given rises of up to 30% in the past two years, there is much further for it to fall before it becomes devastating to most people (excluding those who bought very recently, who, by all accounts probably kept their jobs during the pandemic and are likely financially better able to weather this long term). Mortgage defaults are not a baseline expectation in terms of ability to pay, and those intending to sell a house will likely hold of for a few years until prices recover, with undersupply resulting in a gradual decline or stagnation in prices. Thus, rate rises will not ‘pop’ a housing bubble that may have significant economic consequences.
    - As a side note, economists don’t usually buy into the ‘money printer go brrrr’ explanation of inflation in goods and services; since quantitative easing is something that greases the wheels of financial markets and less so of our personal pockets. So asset price inflation is a real consequence (see stock buybacks in the US) but not CPI inflation (unless it is delivered as ‘helicopter money’ into our personal back accounts or as a universal income, which for the most part, it has not). As a case study look at Japan and their desperate attempts to get inflation going through ‘money printer go brrrr’ over the past 4 decades; and their repeated failure.

  • mini2 on 06/07/2022 - 12:59

    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.

    That's what I don't get - a whole heap of our inflation has been imported and a lot of those things aren't replaceable/can be substitute so surely bumping the interest rate aren't going to help. Unless the RBA's motive is to ensure everyone draw down their massive savings saved up during COVID?

    They also forgotten some of the harder hit areas during COVID are still running at 10%+ unemployment rate, not everyone's on a single digit unfortunately.

    • Elfarol on 06/07/2022 - 13:12

      From the RBA's perspective, the RBA, at some point, needs to normalise rates. Not everyone has a home loan, and among those that do, not everyone has a big home loan that assumed a %0.1 RBA rate; and many of those who borrowed recently are insulated due to fixed rates until next year (and these people likely kept their employment through the pandemic, so they are likely in a better overall financial situation). I think they are betting that this is a 'good moment' due to high savings and mortgage buffers; to raise rates so that they have monetary policy 'dry powder' when they need it (while in ECON101 says you raise rates when you see inflation, this is for demand-side inflation, RBA won't be able to substantively affect the - so far - 'imported' supply-side inflation). There is also a keeping up with the Jones’s factor as other central banks raise rates.

    • cafeman on 06/07/2022 - 14:55

      If we don't roughly peg our rates close to international rates we'll create a large swing in our exchange rate.

      If our central rate is less than the US central rate, demand for the Australian dollar will go up as people borrow from Australia. We'll appreciate relative to the US dollar which will drive down the cost of imported goods but reduce demand for Australian manufactured products (mainly beef, wool, and metals). That will slow the economy further.

      If our rate is higher than the US, the opposite is true.

      The RBA's actions only reflect a monetary response and are aimed at solving some of the issues we're facing, not all of them.

    • MuddyClear on 06/07/2022 - 19:05

      That's what I don't get

      Let me teach you economics 101. Increasing rates forces people with mortgages to save. When people save they are not buying into goods and services, which will drive prices of these assets down like food and petrol.

      Why choose increasing rates over other options for controlling inflation? Well that’s because 70% of Australia have a mortgage or property loan or are renting.

      So what started inflation? The liberal government bright idea of the builders grant. Covid was actually helping drive property prices down as people were running scared. Builders were not getting any customers to sign up. The government fix was the builders grant. Suddenly every man and his dog were buying land and signing up with builders for the grant. Land prices went up. Demand for building resources and labour also went up like crazy - that’s inflation btw. Builders on fixed priced contracts loss money due to inflated prices and started to go under. People were then left with unfinished homes. Thank you liberal government!

      What else contributed to inflation? Russian/Ukraine war and China Covid 0 policy

  • rlf on 06/07/2022 - 13:08
    +2

    Welcome to the New World Order.

    We peaked in the 90s.

  • Eeples on 06/07/2022 - 15:35

    I think the RBA will look to see what happens in New Zealand. (Hard to believe but house prices there are comparable to Oz capital cities).

    Specifically, the NZ reserve bank has way hiked interest rates and it does seem that inflation has been stymied.

    But the question remains what will happen to the NZ housing market? Defaults?

    We shall see.

    Does the RBA believe the Oz housing market is too big to ‘let fail’ ? It probably does. But perhaps a correction is possible; and way overdue anyways imo.

  • srr on 06/07/2022 - 19:03

    very easy. rates have to be raised because money tomorrow cost less than money now - that's inflation. If RBA interest rates below inflation, it's a good business proposition to take a loan from RBA, buy inflation protected bonds https://www.australiangovernmentbonds.gov.au/bond-types/exch… and then have profit at least as a difference between inflation rate and RBA rate with no risk whatsoever.

    • MuddyClear on 06/07/2022 - 19:11
      +2

      rates have to be raised because money tomorrow cost less than money now

      I understand your sentiment, but it should read “money now is worth less tomorrow”.

      • srr on 06/07/2022 - 20:53

        Yes messed up, thanks for correcting

  • dmcneice on 06/07/2022 - 20:57

    I understand what they are "trying" to do by rising the OCR, but my worry is that with the unique supply side problem we are having due to the effects of COVID, that the inflation rate is becoming less related/more divorced from the official cash rate.

    Sure - raising the OCR is supposed to bring down inflation, but what if it doesnt?
    A lot of the items/services that make up inflation are essentials, and not something that can be "cut down on".

    What if the OCR got to 10% and the Inflation Rate was still high (e.g. around 10%). Would the answer to still be to hike the OCR to dampen inflation?

    My point is at what point do they realise that enough is enough?

    • MuddyClear on 07/07/2022 - 00:50

      I feel that your questions is based on the lack of understanding on economics. When demand is greater than supply the cost of living goes up because businesses can afford to charge more for things. In order to get supply to catch up the RBA raises rates to encourage people to save and spend less on goods and services thereby reducing demand and allowing supply to catch up, which stops inflation. Essential items you speak of, like food and petrol for example, will be cut back the least as people need it. Other things like general shopping will be the first to go. How much cutting back will depend on the individual situation.

  • CalvinNS on 06/07/2022 - 22:42

    Prices rising are a consequences of inflation I.e., the increase in the monetary supply. When interest rates are low more people borrow money, due to our fractional reserve banking system this creates new credit and inflates our money. Your dollars are then worth less than before as they are now devalued. Therefore prices rise, not due to increase cost, but due to the devaluing of the dollar.

    Increasing interest rates reduces the amount of borrowers as well as sucking money back out of the system through the interest on national debt.

    Austrian economists have been teaching and warning about this since the removal of the gold standard. War and lockdown policies were merely the pin in the bubble, not the main cause of the situation.

  • Hearthstone on 06/07/2022 - 22:52

    I say just keep it simple and don't try to work out all the intracity of how and why and what causes it because there are so many variables involved it will drive you nuts
    let everyone else deal with how/what/when/why you keep it simple with a paragraph

    Just know that RBA is there to keep things in balance, nothing too hot (hyperinflation) and nothing too cold (deflation)
    and when things get too hot or too cold, they jump in and action, increase or drop rate and create credits/liquidity are their only tools
    This tool can sometimes lead to recession and/or other unintended consequences so you need to have a plan for them in your life when it arrives

    I have a very simple plan

    When I borrow money, I factor in 7-8% as a long-term average rate, even if I borrow at 4%, I still pay 7-8% toward the loan
    that creates a buffer for future shock (don't know what but plan for the worse hope for the best)

    When I have a job, I stack away some money for recession, if recession comes and I am out of a job I can live on this saving for a few years while looking for another job

    then go on living your life, if these 2 scenarios popped up, I know I can deal with it, if not well you paid off your mortage a lot quicker and have plenty of saving for ozbargain deals

  • trashcan on 06/07/2022 - 23:07

    The answer lies back in time.

    • The RBA should have not lowered the rates to 0.1 percent in the first place. It was a knee jerk reaction without much thought put in place how they would go about unwinding the low rates.

    • Not raising interest rates late last year when there was an uptick in inflation still maintaining real negative rates was a blunder.

    • There is more. The biggest blunder as far as I am concerned was Mr. Philip Lowe confirming interest rates would not rise until at least 2024. This just made people and the Banks complacent resulting in more debt creation. This was done by design to goose demand even after an uptick in inflation.

    • Australia has one of the highest private debt to GDP ratio and thus our economy is more sensitive to interest rates than other economies. The lowering of interest rates was designed to increase disposable income for people with mortgages and increase the value of asset to induce demand via the wealth effect.

    • All of the above steps was a calculated move which may have worked if we were the only economy doing it in isolation All major central banks copying from the same play book at the same time has resulted in this mess.

    • The only lever that the RBA had to induce demand was to lower interest rates and the only lever that they now have to reduce demand is to raise interest rates.

    • All central banks are praying for soft landing by way of mild recession to do enough to reduce demand which would lead to reduction in inflation.

    • The neutral rate has historically been closed to inflation. RBA is hoping that by increasing rates to say 3% would be enough to bring down inflation to 3% thus bringing rates back to the neutral rate.

    I personally think RBA's attempt to reign in inflation would lead to recession in the order of magnitude far greater than they anticipate which would lead to RBA (and most central banks) doing a complete U-turn. If at that point in time inflation is still running hot, Gold is your uncle, Silver is your aunt and perhaps Crypto is your love child !!

    • [Deactivated] on 07/07/2022 - 00:32

      All of the above steps was a calculated move which may have worked if we were the only economy doing it in isolation All major central banks copying from the same play book at the same time has resulted in this mess.

      Yeah, everyone doing something often ruins it.

    • MuddyClear on 07/07/2022 - 01:03

      Crypto is your love child !!

      Have you not seen what inflation has done to Crypto? Crypto was once thought to be a great investment to hedge against inflation. That has now proven to be false.

      I personally think RBA's attempt to reign in inflation would lead to recession

      Recession is looming for sure

      • trashcan on 07/07/2022 - 01:55

        Have you not seen what inflation has done to Crypto? Crypto was once thought to be a great investment to hedge against inflation. That has now proven to be false.

        We have seen Crypto's in a falling rates environment and benign inflation. We have seen Crypto's in a rising rate environment and rising inflation. I am yet to see Crypto's in a falling rate environment and high inflation. I have never had a punt on Crypto yet but I would if the last scenario played out.

        • MuddyClear on 08/07/2022 - 22:30

          I am yet to see Crypto's in a falling rate environment and high inflation.

          Where have you been hiding lately?

          • trashcan on 17/07/2022 - 13:12

            @MuddyClear:

            falling rate environment and high inflation.

            When did that happen. Must have been sleep at the wheel :)

  • Omarko on 07/07/2022 - 08:31
    +3

    Prices are not going down. Whole raising of rates is dumb and only makes it harder for people.

    Prices are driven by increasing costs to manufacurers and global supply issues. Reducing peoples cashflow is not going to help with that.

    • nobro25 on 07/07/2022 - 10:10

      Finally a sensible answer I was waiting for. To put in an example.

      Petrol prices say is $2/L and a lettuce head is $10. By raising the RBA cash rate will reduce the amount of inflation. Therefore instead of Petrol inflating to $2.4/L it might go to $2.2/L and a lettuce head will be $12 instead of going to $14.

      Point being is that prices won't go down, it's going up at a slower rate. It'll always be going up, take Milk for example. It'll happen to all commodities and everything else.

    • MuddyClear on 07/07/2022 - 10:41

      Prices are driven by increasing costs to manufacurers and global supply issues. Reducing peoples cashflow is not going to help with that

      Not true. Slow down the demand and there won’t be a supply issue. How do we slow down demand? By raising rates!

      • Omarko on 07/07/2022 - 10:43

        Depends on industry mate. Demand is not higher for retail products - eg food , groceries, people are still buying same but its costing lot more for manufacturers and suppliers to bring it / make it.

        People still need to buy same amount of food, not buying more … but now have to pay more for it. If they buy less, I can guarantee you prices will go up even more as the suppliers will need to keep making margin to have a sustainable business.

        • MuddyClear on 07/07/2022 - 10:49

          Raising rates will affect all inflated areas, some more than others. The biggest asset affected will be property. We just have to ride it out. In the mean time people need to stop needless spending.

          • Omarko on 07/07/2022 - 10:50

            @MuddyClear: Yes, that is very true.

            Maybe OzBargain needs to pause for 6 months haha !

        • trashcan on 07/07/2022 - 10:53
          +1

          People still need to buy same amount of food, not buying more … but now have to pay more for it.

          People would substitute the more expensive food items with cheaper food items, thereby reducing the demand for the more expensive food item resulting in lower prices. Price is determined by supply and demand and not just cost plus margin that business want. If the latter was the case no business would ever fail.

      • tonka on 07/07/2022 - 11:53

        Yeah, but reducing supply demand isn't really what's wanted as that kills jobs. The ideal is to get people to bargain harder and force suppliers to be competitive. Seems like that's not gonna work if the big factor is the oil cartels and the governments profiteering off it.

        • MuddyClear on 07/07/2022 - 12:00

          You’re seeing things in absolute terms. Reducing demand allows supply to catch up , it does not “kill jobs”. Currently businesses are doing too well and are charging inflated prices…

        • trashcan on 07/07/2022 - 12:46

          Reducing demand for goods that are under supplied will not result in suppliers curtaling production leading to job losses. Suppliers would curtail production when there is not enough demand.

          The oil cartels do not set the price. They can only manage the supply of oil in the supply and demand side of the equation. They do manupulate supply which has an effect on price.

          The market sets the price, always has and always will

          • tonka on 07/07/2022 - 19:14
            -1

            @trashcan: Yes market sets the price of course, but not for an essential product unless it's a properly competitive market. And we are all aware the market in this instance is also manipulated in many ways.
            Anyway reducing demand on essential goods really should only be able to be achieved by either making them either no longer essential or removing the consumer. The definition of essential means not discretionary, so raising interest rates should not curtail demand, only poverty would.

            • trashcan on 07/07/2022 - 19:38

              @tonka:

              And we are all aware the market in this instance is also manipulated in many ways.

              Can you give me an example of a manipulated market apart from say oil (due to OPEC).

              The definition of essential means not discretionary,

              The perception of what is essential changes with price. For eg Lettuce at $3 may be essential but may not be so essential at $10.

              raising interest rates should not curtail demand, only poverty would.

              My point exactly, rasing interest rate is by defintion a tool to reduce the people's disposable income hence making them less well off. A drop in one's disposable income is one step closer (albeit very miniscule) to poverty.

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