Understanding the impact of a cost-of-living crisis

26 May 2023

Everywhere you look, whatever you read it seems everyone is talking about the cost-of-living crisis.  Influencers, politicians and celebrities have jumped on the bandwagon offering free advice to regular punters like you and me about how to save money during a cost crunch.

Financial crisis and poverty among those in the community on low or fixed incomes, is not a new phenomenon but in the current economic landscape of inflation and interest rate increases, it is affecting more people. For those who were already on very tight incomes, life went from extremely tough to downright crippling in less than a year. We argued this point at our recent appearances to both the Australian Senate inquiry into poverty and the ACT Assembly inquiry into cost-of-living pressures.

So, what is inflation? How is it measured? And how does it affect the community in general?

Inflation is the change in cost of everyday items. In December 2022 it reached its highest rate in more than three decades, hitting 8.4%.  The measure of inflation is the Consumer Price Index (CPI) which is a quarterly measurement conducted by the Australian Bureau of Statistics. It is measured through calculating the change in the cost of a ‘basket of goods and services’ over a certain period. The hypothetical basket includes everything from food items to things like fuel, utilities, and rent.

You may remember back in 2022, social media went berserk with the price of iceberg lettuces reaching $10 each, a cost that was in part attributed to the flooding which affected supply and increased fuel costs.  It wasn’t just lettuce that was affected, the cost of other pantry staples increased too. To curb inflation and get costs moving back to normal, the Reserve Bank of Australia will move interest rates as a lever to reduce spending. Effectively, because higher interest rates mean your debt repayments are greater, in theory, you will spend less on items you don’t need like going to the movies or out to dinner, thereby curbing inflation. Anyone with a HELP debt, mortgage, car loan, credit card debt, or other debt is affected. The pain of these interest hikes, however, are not equally felt.

A recent Commonwealth Bank of Australia report, which captured data from 7 million of the bank’s customers, found that it was Australians in their early 30s who were most affected by the crushing weight of inflation. Older customers were still spending away on non-discretionary items. And the story wasn’t much different for those with home loans, as 23% of millennial homeowners are planning to refinance in the next six months compared to just 4% of baby boomer borrowers.[1]

As Australians aged 25 to 29 move out and establish their lives with rent and home ownership, they make the largest reductions in expenditure compared with other age groups.

Younger people working in hospitality and retail are also more likely to lose shifts or their jobs when the population, as a whole, curbs spending on items they don’t need, like going out for dinner. This, among other reasons, is why using interest rates to curb inflation has come under strong criticism in the last year.

To manage, many on low incomes are turning to buy now pay later (BNPL) schemes to cover the costs of essential items like electricity. BPNL schemes include products like Afterpay and Zip. Perhaps recognising the trend toward these BPNL schemes among those who have little capacity to absorb debt, the Australian Government just recently announced moves to regulate these loan schemes, effectively treating them like any other credit provider. We’re yet to see what this will look like in practice, but as a regulated credit provider it is likely that regulation will stymie predatory loan practices, mandate hardship provisions, and impact on incredibly disproportionate late fee structures.

We use this edition of Action Matters to talk about the economic landscape and small policy adjustments to assist in cost of living in Canberra, look at BNPL schemes and the campaign to regulate their credit products and share in the frustration of ‘feminist’ financial advisors who live under the misapprehension that all women  are just like them.



[1] https://www.publicaccountant.com.au/news/refinancing-tidal-wave-looms

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