Fewer takeaways, dearer eggs: How inflation hits your hip pocket

Inflation is the lowest in years and interest rates are coming down, but that hasn’t stopped us fretting about finances. Polls show the cost of living is still our No.1 worry.

The latest Resolve Political Monitor, conducted for this masthead, found 41 per cent of voters believe “keeping the cost of living low” should be the government’s top priority, with “housing and rental affordability” a distant second on 10 per cent.

“People have experienced climbing bills for several years, and there’s been a cumulative effect on financial comfort and spending from that,” says Resolve director Jim Reed, who conducts the survey.

“Prices for day-to-day items haven’t become any cheaper, they’ve just stabilised, and many people are still feeling the pinch. Income needs to catch up for that to change.”

Other surveys tell a similar story; the Ipsos Issues Monitor, which asks respondents to nominate Australia’s three greatest challenges, shows “cost of living” shot to the top of our worry list in early 2022 and is still around record levels.

Even though the annual inflation rate eased to a tame 2.1 per cent in the June quarter, consumers are still smarting from the inflationary spike that lasted several years.

Price hikes over time

While economists and policymakers focus on short-term changes in the rate of inflation, consumers are preoccupied with the overall level of prices, especially for household basics.

The consumer price index, or CPI – the official measure of inflation published by the Australian Bureau of Statistics – rose 19.2 per cent over the four years to June, far outstripping wages, which grew by 14.1 per cent over the four years to March, the ABS Wage Cost Index shows.

But many household basics have risen much faster than the overall CPI since mid-2021. This includes eggs (+49 per cent), oils and fats (+46 per cent), bread (+29 per cent) and dairy (+24 per cent). Other essentials to far outstrip inflation are insurance (+39 per cent), gas and other household fuels (+38 per cent) and automotive fuels (+24 per cent).

Dean Pearson, National Australia Bank’s head of behavioural and industry economics, says the way regular consumers view inflation “is quite different” to how economists see it.

“Consumers will basically look at a few key anchor prices, things like utility bills, petrol prices, groceries or rents, and those things leave an outsized impression on them,” he says. “Economists can say that things are improving, but until people actually feel a real, tangible change, they don’t listen to economists.”

Many consumers had never experienced such a sustained bout of inflation, which may also help explain the lingering concern about cost of living.

“If you’re under the age of 40, you probably haven’t seen it like this,” Pearson says. “And inflation has a very tangible impact on people’s lives.”

Still feeling the pinch

Despite a lower rate of inflation, many households are still scaling back spending to make ends meet.

About half of respondents to NAB’s latest consumer sentiment survey said they had spent less eating out at restaurants and denied themselves “micro treats” during the past three months due to cost-of-living pressures. Four in 10 had delayed or made more modest holiday plans, and one in three had delayed a medical appointment.

“Those are very big changes,” Pearson says.

One in five respondents to the NAB survey had sold possessions during the past quarter to help manage financial pressures, while one in seven had borrowed from friends or family.

Households were least inclined to cut spending on private school fees and tutors, children’s extracurricular activities (such as music or sport) and spending on their pets.

There’s evidence the long bout of high inflation has caused lasting changes in consumer behaviour. One example is a boom in the use of cost comparison websites to search for lower prices.

“Consumers are much more knowledgeable about price changes, and they’re much better researched than they’ve ever been before,” Pearson says. “We know the number of people who now price-compare before buying anything is really high; I don’t think those things are going to shift.”

Consumers wary, despite relief

A lower rate of inflation recently has given the Reserve Bank scope to deliver interest rate relief.

The official cash rate has already been cut twice this year; financial markets expect the Reserve board to deliver a further 0.25 percentage point reduction on Tuesday and at least one more cut by Christmas.

Resolve director Jim Reed says opinion polls suggest households are feeling less financial pressure – while cost of living is easily the top concern of voters, the share rating it as “very important” has fallen this year.

“This suggests that meeting living costs is still problematic for some, but at least is not getting worse for most,” he says.

Even so, households are wary that another shock could push up prices again; NAB’s survey found 51 per cent of respondents expected inflation to rise in future, up from 48 per cent in the previous quarter.

“Consumers are now hypervigilant on inflation,” Pearson says.

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