Do you need to worry about inflation and interest rates?

In the words of the Reserve Bank of Australia (RBA), inflation is “an increase in the level of prices of the goods and services that households buy” and “is measured as the rate of change of those prices”.

In Australia, the main economic indicator of inflation is the Consumer Price Index (CPI): a percentage measure of change in the price of a basket of goods and services.

Hence the popular basket picture when people talk about inflation.

For starters, inflation isn’t as high as it may seem – but inflationary shock is feeling sharper because deflation has been the name of the economic game for three decades.

Indeed, in June 2020, the inflation rate dropped to a negative 0.3% figure while between 2012-2020, rates stayed well below 3% – if not 1% – according to ABS.

CoreLogic believes it’s also crucial to understand just why and how high inflation is occurring, as well as what else is going on in the economy at the time.

Dark side to current inflation:

1. Cash rate increases

2. Stalling wage growth

3. Steep price rises in “non-discretionary” but crucial items (fuel, housing and food)

Silver lining to current inflation:

1. Erode the value of debt

For example: Warming economy means wages may rise yet mortgage principals remain fixed, meaning repayments decrease

2. Discretionary spending likely to shrink more quickly in coming months

3. Interest rate rise + slower economic activity slows = potentially reduced inflation

4. Less desirable borrowing for home purchases could equal lower house prices

However, high inflation doesn’t necessarily mean property prices will drop or the property market will crash.

Prices are certainly easing slightly, especially in Melbourne and Sydney but particular areas – such as Adelaide, Perth and Brisbane – are still enjoying almost unnaturally high growth.

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Do you need to worry about inflation and interest rates?

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