19 Dec

An Economic Outlook As Inflationary Pressures Continue To Grow

Posted at 09:16h

There has been a lot of economic information prevailing in the headlines over the last few months.

The lowest unemployment rates in decades are currently in sight, each of the Reserve Bank of Australia’s (RBA) monthly meetings seems to be increasing the interest rates, and inflation is predicted to continue to rise. This is in conjunction with reports that wage growth is not keeping pace with rising prices across industries.

With continued reports of ‘times being tougher’, Australians are continuing to spend more money (leading to further inflationary pressure).

It also leads to job creation due to businesses requiring the goods and services being purchased. The government prefers it when there is a low unemployment rate and a strong economy, but not combined with inflation. This is because when inflation outstrips wage growth, it means a reduction in our standard of living. The government wants to cease the spending as this leads to a slowing of price growth.

While the Reserve Bank is not the government, it still has economic goals about targeting inflation and targeting growth. If Australia is below target, the Reserve Bank will implement interest rate (monetary) policies to stimulate or reduce spending.

What is currently happening is that the RBA is increasing interest rates to put pressure on spending. This should lead to a reduction in spending. The issue is that the RBA had increased rates for numerous months in a row but spending doesn’t seem to be impacted as yet. This is why many experts are predicting interest rates to raise to as high as 6% by the end of the year in a bid to slow the economy.

The Reserve Bank deals with monetary policy but the government can chime in with what is known as “fiscal policy”. When you spend more it adds to economic activity. The same can be said for the government.

If the government spends more it will increase economic activity. But if it spends less it will reduce. If we want to reduce inflation this would suggest that the government would apply fiscal policy and reduce its spending so as to slow the economy. The government is more political in their decisions than the Reserve Bank, so there may be less contention in play.

Coming up in October will be another Federal Budget, marking it as the second this year. It will be interesting to see the fiscal policies adopted by the new government announced later on.

How Do We Cope With High Inflation?

The best way to combat rising inflation is to return to basics. This is exactly what the policies of the Reserve Bank (and potentially the Government) are trying to force everyone to do.

Firstly, the cause of inflation in the first place is the spending that has occurred. It’s a simple case of supply and demand. Businesses see increased demand for their products and services alongside less staff available to provide their products and services, then their prices will rise. If there is less demand, they won’t be so inclined to do so.

So what do we mean by “return to basics”

As your first step, set a detailed budget.

Work out what spending is not discretionary (fuel, food, electricity, mortgage etc) and what is discretionary (gym, foxtel, coffees at the coffee shop, movies etc). If you still have money left over then you should focus on paying down debt rather than things like holidays. Pay down bad debt (eg credit cards) first before things like mortgages. Reducing debt will also ensure that increasing interest rates have a lesser impact on you.

If you are currently without debt, it may be a good time to invest more (depending on your personal circumstances and other factors).

A second job could also assist with mitigating those increased costs. There is a higher demand for positions to be filled, with good rates of pay attached. The gig economy (ridesharing, food delivery, etc) may be worth looking into.

Unfortunately there is no silver bullet to shield yourself from high inflation. Every single person will find themselves in a different position, with various factors affecting them.

If you feel overwhelmed it is a good time to seek the advice of a trusted adviser. That is why we are here.

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