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Employee households, mortgage holders hit hardest by inflation, rate hikes: ABS
Australian households experienced a jump in living costs in the March quarter as interest rates rose, and the hardest hit were homeowners with a mortgage, with costs rising at a record level, according to new data from the Australian Bureau of Statistics (ABS).
The ABS’s Selected Living Cost Indexes (SLCIs) break down the rise in living costs for different types of households, and unlike the Consumer Price Index (CPI), they include mortgage costs. The agency has excluded home borrowing costs from the CPI since 1998 despite their huge impact on household budgets, and the index instead includes the cost of building a new dwelling.
The magnitude of price changes varies between household types due to their different spending patterns. Employee households experienced the largest annual rise in living costs of all household types, rising by 9.6 per cent in the March quarter, also the largest increase on record.
“Employee households were particularly impacted by increases in mortgage interest charges, which are a larger proportion of their spending than for the other household types,” said Michelle Marquardt, ABS head of prices statistics. “Mortgage interest charges rose 78.9 per cent over the year. This was up from a 61.3 per cent annual rise in the December 2022 quarter, reflecting the Reserve Bank of Australia’s cash rate rises.” Increases in the SLCIs ranged from 7.1 per cent for self-funded retirees to 9.6 per cent for employee households, all sitting above the official 7 per cent annual increase in the CPI (see chart).
Over the March 2023 quarter alone, living costs for all household types increased between 1.3 and 2.2 per cent. All household types, except self-funded retirees, experienced a quarterly increase in living costs higher than the CPI rise of 1.4 per cent (see chart).
“Higher prices for health, housing, food and interest charges contributed to increased living costs for all household types,” Marquardt said. Medical and hospital services rose due to an increase in non-hospital medical services, as general practitioners and other health service providers typically review their fees in the March quarter after the Medicare Safety Net is reset on January 1 each year.
More pain to come from central bank
Diana Mousina, deputy chief economist at AMP, says homeowners are set to experience more pain this year as fixed-rate mortgages expire and borrowers shift to variable-rate mortgages, at much higher interest rates.
“There will be further pressure on household budgets and cash flows as household mortgage repayments rise further from recent rate hikes in March and May for those on variable rates and the approximate 880,000 fixed rate mortgages that roll off in 2023,” Mousina said.
“On the RBA’s own estimates, around 15 per cent of borrowers will have negative cash flows with the cash rate at 3.75 per cent. The cash rate has now surpassed this after May’s hike to 3.85 per cent.”
Mousina says the SLCIs are a very good guide to the ‘actual’ rate of inflation that consumers pay “because housing is such a big chunk of everyday spending.” While she doesn’t think any more rate rises from the RBA are necessary as the economy slows, nothing is sure.
“The risk is that the RBA judges that Australian rates need to be comparable to overseas counterparts and continues to place high emphasis on backward-looking inflation and unemployment data which are lagging indicators of the economy.” Mousina does not rule out another one or two rate rises this year.
Economists at UBS forecast another 25-basis-point rise in the cash rate to 4.1 per cent, with the most likely timing in July, after the minimum wage decision due in June.
RBA Governor Philip Lowe has also made it clear this week that the central bank may raise interest rates again in coming months. “Looking forward, some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” he said.
