Cost of living crunch: How long will prices keep rising?

Inflation is on the rise. The Consumer Price Index (CPI), which tracks the cost of typical household goods and services, surpassed many expectations in the March quarter by jumping to 5.1% which is the highest point it's reached in years.

Anyone who's filled up their car or shopped for groceries in recent months doesn't need that CPI figure to confirm the price rises they've been witnessing with their own eyes though - after all, the cost of living is on the minds of many Australians.

Close to nine in 10 households surveyed as part of CHOICE's most recent Consumer Pulse said that they had noticed increases in the price of essentials, with one in five reporting that they were struggling to make ends meet on their current incomes.

"Our new Consumer Pulse data is the latest indicator that households across Australia are doing it tough at the moment," says CHOICE editor, Marg Rafferty. "Cost of living pressure has become a major issue and it is not hard to see why when almost 90% of Australians are seeing the price of daily essentials rise faster than their capacity to pay for them."

Why has the cost of living increased?

Like so many parts of life in the past two years, COVID-19 has had a major impact on the rising prices we've seen across everyday goods and services.

"The pandemic distorted the ability of companies to supply goods by disrupting global production," AMP chief economist Shane Oliver explains. "When people were locked down they couldn't go to factories to make things, and it disrupted transport because people couldn't get on ships or planes, and ships couldn't get be unloaded."

"It also meant that people couldn't go out and spend on services, so spending on services collapsed by about 20% below trend, whereas spending on goods rose by something like 20% above trend."

"That surge in the demand for goods occurred at a time when supply was also being constrained, so naturally prices went up. Initially during the pandemic companies were able to draw down on their inventory stockpiles, but when those started to run low, they had to start putting prices up."

And while the impacts of the pandemic linger on, they've now been joined by the fallout of the conflict in Ukraine and natural disasters at home.

"Supply constraints have been made worse by the war in Ukraine which has pushed up commodity prices - particularly for energy and wheat," says Oliver. "Then the floods on the east coast of Australia affected the production of fruit and vegetables. And all of these things have come together to push up prices."

When is inflation going to peak?

Without a crystal ball there's no exact way of knowing when inflation will peak in Australia, but current expectations suggest that we've still got a way to go.

In his latest monetary policy decision Reserve Bank governor Philip Lowe suggested that headline inflation was likely to reach roughly 6% later this year, before falling back to around 3% by mid-2024 which is closer to the RBA's inflation target.

That sentiment is shared by Oliver who thinks that inflation is likely to continue to rise in the short term.

"In Australia we're lagging behind the rest of the world a little bit, so odds are that we'll probably see a further acceleration of inflation to around 6% by year's end."

The positive news is that there are signs emerging that US inflation may have reached a ceiling for now, or at least, started to stabilise.

"There's a good chance that in the US inflation may have peaked," says Oliver. "We are seeing lower increases compared to what we were seeing a year ago which means the annual rate of inflation, which got to 8.5% in March, slowed down to 8.3% in April. Although, that's still very high."

What does that mean for the cost of goods and services?

Given that the root causes impacting the supply and demand of many goods and services aren't going to ease disappear overnight, there's likely to be more pain for household budgets in the short term. Here are a few costs that could stay high or even rise.

Fuel

After hitting a peak of around $2.20 per litre in March, petrol prices have since eased off, though they remain relatively high compared to recent years. Unfortunately for drivers, high prices are likely to stick around while the war in Ukraine continues, and they could even be pushed higher once again.

"The Russian invasion of Ukraine was always going to have a profound impact on world oil prices and therefore on the price at the bowser wherever you live in the world," says NRMA spokesperson Peter Khoury.

"The current lockdowns in some major cities in China are putting downward pressure on oil prices, but when those lockdowns come to an end the demand for oil is going to increase, likely very quickly, which could mean we see those prices skyrocket."

Electricity

With winter just weeks away nobody's going to love the thought of having to seriously consider the impact of their heating use over the colder months, but that could be the reality for many households thanks to an anticipated electricity price rise on the horizon.

Last month the Australian Energy Market Operator (AEMO) revealed that wholesale electricity prices had skyrocketed by 141% year-on-year during the first quarter of 2022 thanks to coal generator outages, higher generating costs and increased demand. And as a result, at least some of that increase is likely to be passed on to customers in the form of higher energy bills.

Groceries

While the major flooding which hit parts of New South Wales and Queensland earlier in the year has had a substantial cost impact on a variety of produce, there are also other local and international factors that are set to keep the price of groceries higher than normal.

"The cost of shipping ingredients and finished goods to Australia has risen by 500 to 700%," says the chief executive of the Australian Food and Grocery Council, Tanya Barden.

"There have also been significant costs to business as a result of COVID safety measures, domestic freight cost increases caused by weather disruptions, shortages of pallets and rises in the cost of packaging. Adding to this unprecedented COVID disruption, manufacturers are facing increases in global commodity prices because of the situation in Ukraine and they are now seeing increases in labour costs."

For now, if you're looking for some tips to reduce your spending then check out these four tips to cut grocery costs or these six ways to beat soaring fuel prices.

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