Once again the Reserve Bank has made it clear that the poor and marginalised in the community will feel the brunt of its tightening in monetary policy to control inflation — which no one in Australia outside company C-suites is responsible for.
The central bank’s August statement of monetary policy, released on Friday, makes no bones about it — Australian households face a fall in their real incomes until 2024.
The RBA now sees real disposable household income falling for almost a year and a half, including a 3.1% drop in the June quarter of next year. It will only start growing in late 2024, which is too far out in the forecast period to be accurate.
In the May statement, the bank said it expected household income to grow by 0.9% in the final three months of this year. Now it believes they will shrink by 0.9%.
Even by the end of next year, incomes are tipped to be going backwards by just under 1% (0.9%).
The line from the RBA, as it has repeatedly hiked rates, has been that Australian households have plenty of “buffers” — savings built up over the pandemic that they can now draw down to cope with higher mortgage payments and a rising cost of living.
Except, low-income earners have much less in the way of buffers. Finally, the Bank has admitted that.
“Higher prices, especially for food and fuel, are likely to impact low-income households in particular (which tend to spend a larger share of their income on these necessary items),” the Bank said.
“While household balance sheets are generally strong and many households should be able to absorb these price increases, others have limited savings buffers and may have to reduce spending elsewhere. For some of these more vulnerable households, the impact of price rises will be mitigated to some extent by the indexation of social assistance payments twice per year, though price rises will reduce recipients’ real incomes in the near term.”
Low-income households with mortgages, of course, face the double impact of higher mortgage costs. And it’s not much better for renters, who face rapidly rising rents due to a housing crisis no politician seems serious about responding to.
There’s virtually nothing such households can do about inflation — they have little discretionary spending to curb. For such households, reducing demand would be about choosing whether to fill the car, pay the power bill or put food on the table. But they have to pay the price for supply chain problems, a spike in energy prices, the pandemic and the greedy profiteering of corporate executives using general inflation as a cover to boost profits.
The Bank revised down its shorter-term forecasts of wages growth from May. What was 2.7% for the year to June is now expected to be 2.6%. But it’s OK — as always with the RBA, surging wages growth is just around the corner, up to 3.4% in June 2023 and 3.7% a year later. If only workers could take the RBA’s promises to the supermarket and pay for their groceries with SMP forecasts. The June wage price index (WPI) will be out on August 17, so we’ll find out whether wages growth has finally cracked a whopping 2.5% for the first time since 2014.
Inflation is expected by the Bank to peak at 7.8% in the December quarter, edge down to 6.2% by the middle of next year and still be at 3.5% in the June quarter of 2024.
That still means a massive 2.8% fall in real wages this financial year, after a 3.5% fall in 2021-22. All after a decade of wage stagnation — a decade the RBA could never quite bring itself to forecast.
The RBA is also optimistic, with stronger grounds, on unemployment. The jobs market is expected to defy the tightening in monetary policy, with unemployment still at 3.4% by the middle of next year and 3.7% 12 months later.
But in turning the screws on households, and especially low-income earners, the Bank admits this might have an impact. “A decline in real incomes for the average household could weigh on spending more than expected, particularly if household wealth is also declining.”
That will in turn flow through to the job market, with falling spending forcing businesses to lay off staff — particularly in discretionary spending areas like non-essential retail, hospitality and travel. Those also happen to be where a lot of low-income earners work. To steal a line from Paul Keating, God help you if you’re a low-income renter with a retail job.
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