Australia’s Reserve Bank has been accused of driving some of the deeply entrenched inflation it has been trying to tame via interest rate hikes, with new research showing rises in households’ living costs have far outpaced official CPI figures.
The research from Airteam and Primara Research revealed that CPI no longer truly represented the increases in prices and goods people pay because the figures do not capture rises in housing costs or the challenges created by poor housing affordability.
The Consumer Price Index, or CPI, is the primary metric the Reserve Bank uses to guide its monetary policy, with the central bank tasked with keeping inflation between 2-3 per cent.
Roughly three quarters of respondents to Airteam and Primara polling said their personal costs had risen faster than official inflation figures showed. Only one in six Australians agreed that CPI represented changes in their cost of living.
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The Consumer Price Index (CPI) is calculated by averaging the cost of goods and services like a loaf of bread. Picture: Monique Harmer
The research tested respondents’ views by rebuilding CPI measurements into four tailored metrics that better captured rises in housing costs, which remain the biggest burden on household spending.
It found that mortgage holders costs had increased by 29.5 per cent over the last four years – well above the 18.6 per cent rate of inflation over the period.
Meanwhile, those with fully paid off homes had living cost increases at 17.4 per cent, below the rate of inflation.
Primara head of research Peter Drennan said these findings suggested the Reserve Bank’s interest rate hikes, announced as a way to cool inflation, were actually backfiring.
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RBA Governor Michelle Bullock has increased interest rates multiple times in recent years. Picture: NewsWire / Martin Ollman
“These tailored measures expose a critical contradiction in how monetary policy actually works,” Mr Drennan said, noting that rate hikes punished mortgage holders but left wealthy Aussies with fully paid off homes and high savings in a better position.
“When rates rise, mortgage holders see costs skyrocket by amounts official CPI doesn’t capture,” he said.
“Meanwhile, renters and outright owners, two-thirds of households, effectively see real income rise. That purchasing power can fuel the very discretionary inflation rate rises are meant to cool.”
The research revealed that housing affordability had reshaped who carried the burden of rate hikes over time.
Falling homeownership rates among younger Australians meant fewer people were exposed to any mortgage costs, while those with mortgages had to take on more debt relative to their income to get into the property market.
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Only 40 per cent of Aussies are mortgage-holders. Picture: NewsWire / Max Mason-Hubers
The result “was a shrinking pool of mortgage holders carrying a heavier load”, the research showed.
“Outright owners and renters, the 60 per cent of households without a mortgage, carry none of these housing costs directly,” the research said.
“When rates rise, they face no extra hardship, yet their purchasing power still increases as wages and returns on savings adjust upward. They receive the benefit of rate rises without facing any of the cost.”
Airteam CEO Rich Atkinson said including measures of housing costs into inflation measures exposed a “completely different economic reality” for many households.
Higher rates may actually be backfiring, the research suggested. Picture: NCA Newswire
“A mortgage holder and a renter might shop at the same supermarket and pay the same petrol prices, but their overall cost of living is fundamentally different,” Mr Atkinson said.
Mortgage holders are already the most stretched group when it comes to housing affordability, and now they’re the only ones absorbing the cost when rates rise to fight inflation.”
Close to two thirds of survey respondents said they wanted mortgages included in how CPI is calculated.