How high could inflation go in Australia? That’s a big question. Inflation is impacting every Australian at the moment. Home loan interest rates are on the rise, energy prices are heading upwards and even the cost of food is increasing, like lettuce and beef. Like most Australians – particularly home owners – you’re probably wondering how high could inflation go in Australia? Here’s what we can expect.

How high could inflation go?

The current situation

The Australian Bureau of Statistics (ABS) reported that annual inflation in Australia is currently at 6.1%. This is the highest recorded rate of inflation since the last peak in 1990. Global inflation is also on the rise – having started surging in early 2021. And Australia certainly isn’t copping the worst of it, with inflation in the US at 9.1% and in the UK at 9.4%.

What is causing the rise in inflation?

There isn’t one single reason that inflation is on the rise. It’s a combination of factors. But it generally comes down to both an increase in demand, and a decrease in supply that has led to rising inflation.

1. The economy is recovering well post-Covid.

Ironically, one of the big factors is that the economy is recovering more strongly than expected. This is partly due to the stimulus packages provided by the government. Australians across the country have more money to spend, leading to price increases.

2. Manufacturing moving back West.

Over the past 20 years, prices have been trending generally down. Globally, businesses have been looking at ways to build in economies of scale (creating more at a lower cost). This often meant taking work overseas or into the East. With the pandemic, manufacturing was disrupted, and inexpensive items produced overseas were not accessible. People were left to buy local items at a higher cost.

3. Supply issues.

Supply issues from political disruptions (such as the war in the Ukraine) and supply chain disruptions contributed to the price increases. In fact, shipping costs increased by up to 400%. The costs of these disruptions and supply issues has been passed down to Australians in the costs of goods.

Inflation’s impact on Australians

Rising costs have meant that the cost of living is getting more and more expensive in Australia. Combined with wages which have not increased or have even decreased over the past five years, and Australians across the nation are experiencing falls in their material living standards. They simply aren’t able to maintain the same lifestyle that they could prior to 2021.

The RBA’s response

The RBA has responded to the rising inflation rate by raising interest rates. Their goal is to scrape supply and demand back into a better balance and slow down the economy (and inflation). These rising interest rates have knock on effects for the average Australian who is more than likely to have variable rate home loans. It means that more of their income has to go to servicing their mortgage while they tighten their belts in other ways.

So… how high could inflation go?

Inflation isn’t expected to peak in Australia until the end of the year. Both the federal government and the RBA have forecast that inflation will reach its peak of 7.75% around December 2022. In 2023, inflation will start to decrease and, at the same time, wages are expected to increase. In the meantime, however, things will get harder before they get easier.

How high could interest rates go?

Once you’ve answered the question, how high could inflation go, you’ll also want to answer the question, how high could interest rates go? When it comes to interest rates, experts believe the cash rate could peak at around 2.5%.  And if this is the case, that could see variable interest rates rising above 5%. Homeowners need to be prepared for these rising interest rates.

Find out how you’re positioned

Now is a good time to find out how you’re currently positioned. You can (and should) do a home loan health check to see if your current home loan is the best for you and your situation. And if you have found that it’s not, then it’s a great time to consider refinancing. You might even get a better deal that will see you through the tricky times.

Speak to an expert

Now that you have an idea of how high inflation could go, get in touch with our expert team. We can talk you through your options, including the refinancing process if that’s a good solution for you. And with over 40 of Australia’s biggest banks and lending specialists at our fingertips, you have a wide range to choose from. Give us a call today at Lending Loop.