Governments need to step up to fight inflation + Taylor Swift

Hi everyone,

Happy Friday. 

For me it can’t come fast enough. Tonight, Libby and I head off to see Taylor Swift with our two oldest granddaughters and two oldest daughters. To say there is excitement all round would be an understatement. My granddaughters have made us friendship bracelets and we have our outfits sorted… I’m wearing a “heartbreak prince” t-shirt which is very understated compared with the girls who are each representing a different Swift era. 

What a phenomenon Swift is. She brings so much joy to so many people. She has respect and affection for her fans, songs that resonate and she’s a great performer.

I was flying from Adelaide to Sydney last Friday and it was just beautiful to see so many mums (and a few dads) with their daughters flying to Melbourne for the concerts. Takes me back to when mum and dad took me to Adelaide airport as a 7-year-old to see The Beatles arrive. 

So many lifetime memories created by Swift’s tour. It is just wonderful. 

Anyway, I’ll post a photo later. 

But down to this week’s money issues you need to know about:

• Wage rises continue to fuel inflation.

• Latest thoughts from the Reserve Bank.

• House prices are outperforming units.

• Save on car insurance by using a dashcam.

• Start preparing for health insurance hikes.

Just an aside first up: 40 per cent of Australians now retire while still having a mortgage… that’s up from 16 per cent 20 years ago. So rate hikes impact a lot of young AND old Australians.

Governments need to help the RBA fight inflation

The Reserve Bank boss, Michele Bullock, recently said interest rates were a “blunt instrument” when it came to fighting inflation. In other words, the impact of interest rate rises can be a bit of a sledgehammer in dampening the economy to keep inflation down. But it’s the only instrument the RBA has at its disposal.

The other inflation-fighting instruments are held by governments in terms of fiscal policy.

Governments can cut spending to dampen the economy but they don’t want to make those hard decisions. They want to be seen as the good guys and are very happy to paint the RBA as the bad guys.

I’ve made this point many times. Federal Treasurer Jim Chalmers can’t promise everyone a big pay rise and then grumble about high inflation and the need to bring it down through higher interest rates. Those wage rises feed into inflation which then causes rates to rise.

This week’s wages data is a classic example. Wages rose by 0.9 per cent in the December quarter and 4.2 per cent for the year – above expectations and above the September quarter figure of 4.1 per cent.

What’s driving the increased wage growth is government pay rises to public servants, which are outweighing pay rises in business. In the December quarter public service wages rose 1.3 per cent while wages in business were up 0.9 per cent.

The key driver of growth in the public sector was new enterprise agreements for essential workers linked to NSW and Queensland state wage policy outcomes. The NSW government provided wage increases of 4.5 per cent and the Queensland government 4 per cent.

Eligible jobs in Queensland also received top-up payments from a “Cost of Living Adjustment” in addition to the wage increase. NSW teachers also saw historic pay increases in the December quarter of between 8 and 12 per cent. As a result, public sector wages in Queensland rose by 5.4 per cent (the strongest of all the states and territories) while NSW public sector wages rose by 4.9 per cent – up from 3.2 per cent in the September quarter.

I know we all love a pay rise, but it is a delicate balance for the economy as it feeds into inflation and then the RBA thinking on whether another rate rise is needed.

But my point is governments need to do some of the heavy lifting to fight inflation and not simply leave the hard decisions to the Reserve Bank.

However, it’s a real economic chicken and egg dilemma. Wages are up, but so is inflation and inflation destroys the purchasing power of wages.

Look at this chart which shows “real wages” (which are wage rises less the inflation rate):

Wage rises in terms of the value of what they purchase have been falling. In other words, the dollars in your pay packet are buying less because prices for the goods and service you buy are rising at a higher rate.

The problem is that wage rises given to keep pace with inflation are themselves feeding into inflation and eroding your purchasing power even more. It is a vicious cycle.

Again, that’s why governments need to use other measures to fight inflation and break the cycle.

The latest thoughts from the RBA

As I said two weeks ago, I love the new RBA format for announcing its Board meeting decisions. The announcement is now followed by a press conference from the RBA Governor.

The only problem is that when the RBA minutes of the Board meeting are released two weeks later there is nothing new. It has all been said on announcement day.

So this week’s release of the last Board minutes was a bit of an anti-climax. A good thing, but we need to get used to it.

The minutes confirmed that the Board once again considered two options for monetary policy in February: raising the cash rate target by a further 0.25 per cent or holding the cash rate target steady. These two options have been considered at each of the last nine Board meetings.

Importantly the Board did not consider the case to cut that cash rate. It’s way too early for that.

As the minutes note: “The risk of inflation not returning to the Board’s target within a reasonable timeframe had eased. The moderation in inflation over preceding months had been slightly larger than previously expected, and global inflation outcomes had provided additional confidence that inflation in Australia would moderate further… data on the labour market and consumer spending had also been weaker than previously expected.”

Remember the RBA’s big focus is keeping people in jobs. They are closely watching that unemployment figure which popped above 4 per cent in January. If it gets above 4.5 per cent then I reckon they will start looking at rate cuts.

They are also conscious of the impact of higher rates on households.

The minutes noted that a broader measure of total debt repayments (which includes personal loan repayments) as a share of household income remained below its estimated peak, given the stock of personal credit has declined significantly since 2008.

The remark that, “extra payments into mortgage offset and redraw accounts had also declined since 2022, though they had increased in the second half of 2023” is important.

The incentive to pay down debt (i.e. save) has increased along with the lift in interest rates.

The next RBA Board meeting is 19 March… not the traditional first Tuesday of the month. By then it will have an update on inflation from the January monthly CPI indicator (due next Wednesday). And importantly the national accounts on 6 March.

House prices continues to rise faster than home units

Underlying land value, scarcity and desire for more space through the pandemic has led to a substantially larger rise in house values relative to unit values over the past four years.

At the onset of the pandemic in March 2020, the house premium, or the difference between median capital city house and unit values, was just 16.7 per cent. Fast forward almost four years later, and that premium has jumped to 45.2 per cent or $293,950.

According to property research group CoreLogic, houses have historically attracted a price premium over units, and have shown a higher rate of capital gain, but during the pandemic the house premium rose sharply.

While the premium contracted through the early part of the rate hiking cycle as house values fell more than unit values, the gap between house and unit values has since rebounded to a new record high.

Across the capital cities, Sydney has seen the largest expansion in the house premium since the pandemic, with the gap between house and unit values widening by almost 36 per cent, catapulting it from sixth to first position on CoreLogic’s “premium league” table.

Melbourne, Perth, Adelaide and Brisbane have all seen their house premium grow between 15 and 16 per cent over the same period, while Darwin has seen its house premium reduce by 12.2 per cent.

But there has been a change in trend over the past 12 months. While Sydney tops the table again for largest 12-month change in premium followed by Canberra, several cities have seen the premium shrink back a little, including Brisbane and Adelaide.

This could be reflective of homebuyers seeking out more affordable housing options, which has diverted more demand towards units.

Across the combined capitals, five of the suburbs with the largest house premium are in Sydney, three are in Melbourne and two in Perth. 

You notice many of the suburbs with the largest house premium are very affluent markets.

Conversely, according to CoreLogic, the suburbs with the smallest differential in price between a house and unit may offer good buying opportunities. Those able to stretch themselves can secure a piece of land without the hefty premium being seen in other parts of the capital cities.

Australia’s Navy compared to the superpowers

Just an aside after all the headlines this week of overhauling Australia’s Navy and the move to building a different type of ship. 

Australia owns 32 commissioned Navy ships and 11 non-commissioned. 

I was reading the latest newsletter from consultants Bondi Partners this week and it showed this chart of the Chinese and US Navy fleet.

It sure puts our discussions into perspective.

A good hack to bring your car insurance premiums down

Usually, small black boxes are associated with expensive rings, but what if one that many drivers already have could be saving you money instead? Car insurance comparison website Compare the Market (where I am Economic Director) has found that 20 per cent of car insurers offer discounts to drivers who have a dashcam installed in their car. 

The average discount from these insurers, based on 36 individual quotes, was 4.15 per cent when compared to the same make and model car without a dashcam. 

The research also found that of those insurers that offer a discount for installed dashcams, Queenslanders get the biggest discount on average at 4.65 per cent off their premium. Victorians get a more modest saving of 3.97 per cent, while New South Wales drivers get an average discount of 3.84 per cent. But the exact rate will depend on your policy.

This little tip could be another way for you to claw back some cash amid the cost-of-living crisis. 

It’s incredible to think that such a small item that many people already have could be saving you money on car insurance in the long term. As I always say, people shouldn’t just accept a bill, or renewal notice lying down. Scrutinise all your bills and take action if you see a better deal out there. 

All it takes is for people to give their insurance company a quick call to see if they offer a discount for having a dashcam. If they don’t, run a comparison to find insurers that do and see if you can find a better deal. 

The good thing about dashcams is they're not a one-trick pony. Not only do some insurers consider dashcams a safety feature, but they can also be a great reference point to fall back on if you ever need to claim. By having a perfect recount of a potential accident or incident, you may be able to prove that you’re not at fault in more complex cases. 

Drivers are able to buy dashcams for as little as $14 online, while more complex dashcams with greater resolution come with a much higher price tag. 

At the end of the day, it’s a small investment that offers you savings, as well as peace of mind for anything that may happen in the future. 

Start preparing for health insurance premium hikes and chase a better deal

Time is running out to give customers a fair chance to act on health insurance rate hikes this year. 

On 1 April the federal government usually allows private health insurers to lift premiums for 14 million Australians. By how much is usually announced in December but we still haven’t had any indication for this year and it’s now the end of February. 

We know from years past that these price hikes can add hundreds of dollars to private health premiums and that’s too much for many families already at their limit. 

Consumers usually have a lot more warning to prepare. If this year’s announcement is pushed out to March they could have as little as a month to consider their options. 

I’ll have lots of tips on finding the best deals over the next couple of weeks.