The inflation dragon is tamed, but the cost of living is biting

If the Reserve Bank and politicians needed any further evidence that higher interest rates are starting to bite, look no further than the national accounts.

Household spending – the engine that drives the Australian economy – is starting to splutter after rate increase after rate increase on top of higher inflation, which is eating into the relatively modest increase in wages.

The inflation dragon may be retreating but the cost of living is biting.Credit:JAMES DAVIES

Consumer spending increased 0.3 per cent through the final three months of 2022. That’s the smallest increase since we were shut into our homes through winter and early spring in 2021.

Spending volumes fell on recreation and culture, clothing and footwear and on household furnishings – all discretionary areas. Spending rose on essentials, with food and rent the key drivers.

To keep up that spending, the amount socked away by households fell. The household savings ratio, which averaged 6.5 per cent pre-COVID, fell to 4.5 per cent in the December quarter.

That’s the lowest since the September quarter of 2017 and only the second time it has been this low since the global financial crisis destabilised household savings plans.

Gross disposable income fell – only the fourth time that’s happened in the past eight years.

Driving this pinch has been interest rates. Interest paid on dwellings jumped by 23 per cent, a reflection of three quarter-percentage point increases in official interest rates during the quarter (and a hangover from earlier rate rises).

The overall result of 2.7 per cent growth over the past 12 months outwardly suggests the economy is chugging along (and better than just about every other developed nation in the world).

But once you take into account population growth, it’s not nearly as good. Per capita GDP was flat in the December quarter after rising just 0.1 per cent in the September quarter.

EY chief economist Cherelle Murphy noted the gap between GDP over the past year and GDP per capita is now at its largest since 2009.

In the quarter, spending per person fell for the first time since late 2019.

In other words, if it wasn’t for population growth – including the tourists and international students now returning to our shores – the overall result would have been pretty poor.

The national accounts weren’t the only figures confirming the impact of higher interest rates on the economy.

The Australian Bureau of Statistics’ monthly measure of inflation is also signalling a bit of rate pain.

Clothing prices dropped 5 per cent in January in a sign consumer demand is starting to edge down.Credit:Getty

Prices for clothing and footwear, for instance, fell by 3.6 per cent in the month. Clothes alone dipped by 5 per cent. There were also falls in household furnishings and equipment.

There are also positive signs the impact of last year’s floods, which drove up food costs, are starting to ebb, with a 2.9 per cent drop in fruit and vegetable prices.

The same figures also confirmed the nation’s rental market is a disaster, with another sharp rise in rents. The annual rate of increase has jumped from 3.6 per cent in November to 4.8 per cent in January with no signs of it abating.

Higher interest rates are not going to solve the fights going on around the nation’s suburbs as prospective renters examine potential lodgings.

The inflation dragon has been causing plenty of damage since it emerged from its cave more than 12 months ago. The Reserve Bank may have early evidence that it’s headed back to its lair.

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