Recent data shows the consumer price index (CPI) rose by 2.2 per cent in the last quarter of 2024, landing within the Reserve Bank’s target range of 1 to 3 per cent. While economists are celebrating this milestone, the reality for many families is not something to cheer about.
The key challenge lies in the lag between economic indicators improving and households feeling the benefits. Wages have started to outpace inflation but the tangible impact on purchasing power takes time to take effect. Many households remain cautious as everyday expenses such as rent, food, and insurance continue to climb. For now at least, households across the country are counting every penny to make ends meet.
A significant shift could come mid-year. More than 80 per cent of mortgages are set to be refixed in the next 12 months, giving some breathing room to many. However, this optimism is tempered by recent price hikes. Households are still grappling with the fact that essentials are still expensive when compared to just a few years ago. The psychological impact of higher prices adds to the sense of financial strain.
Economic experts point out that while inflation has stabilised, the cost of living is a broader issue. Essentials like fuel, rent, and groceries have shown diverging trends, impacting households differently according to their spending patterns. For example, those that rely heavily on products like dairy for instance are likely to feel the pressure more than others. The misconception that prices would fall after the inflation surge has also contributed to a sense of dissatisfaction. Instead of costs falling as many expected, they are instead remaining where they are, keeping the pressure on.
Interest rate trends provide a mixed outlook. Economists expect the Reserve Bank to cut the official cash rate (OCR) by 50 basis points next month. The extent of any further reductions remains unclear. While lower interest rates could ease mortgage pressures, global economic factors might limit how much rates can drop. Bond and swap rates have risen, indicating that the Reserve Bank may face restrictions preventing them from bringing the OCR much lower.
As the economy begins to recover and businesses implement pay rises, the second half of the year should bring some relief. However, the journey to financial stability will take time as incomes catch up with higher living costs. For now, households must endure stabilising inflation, stubbornly high expenses, and evolving interest rates.
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