Is Australia's Cost of Living Crisis Truly on the Decline?

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Analysts suggest that the cost of living crisis, which has troubled Australians during periods of soaring inflation, might be starting to subside. However, some charity organizations caution that increasing wealth disparity continues to cause hardship for many.

Maiy Azize, deputy director at Anglicare, expressed to SBS News that it is “really frustrating” for individuals to hear claims that the crisis has ended, especially since millions in Australia are still finding it difficult to afford their basic needs.

“Over the years, we’ve seen significant price hikes in essentials such as food and fuel. Electricity costs have reached unprecedented levels, energy debts are high, and rents have soared,” she explained.

Azize pointed out that Anglicare has not observed any significant decrease in the number of people seeking their assistance.

“We’re certainly not noticing a reduction in individuals coming for services like emergency relief, bill support, and financial counselling. There’s no improvement in this area,” she stated.

“When people hear that the cost of living situation is improving, they might hope for prices to decline and for relief to be near. But actually, costs aren’t decreasing for them, and they still require our aid just as much.”

Household spending ticks up

Investment research company Morningstar published a report this month telling retail investors the cost of living crisis would become a “thing of the past”, as people start to spend more on non-essential items.

Commonwealth Bank analysis shows household spending rose for a third consecutive month in June, up 0.3 per cent following gains of 0.4 per cent in April and May.

“Household spending is starting to show signs of consistency month-on-month and should continue to pick up this year as consumers begin to loosen their purse strings,” the bank’s senior economist Belinda Allen said in a statement earlier this month.

“This recovery is taking longer than expected to occur, but there are green shoots emerging.”

Many anticipated that the bank would reduce the cash rate in response to inflation, with the Consumer Price Index for May dropping to 2.1 percent from 2.4 percent in April.

A person opening their wallet. Inside are Australian banknotes.

According to an analysis by the Commonwealth Bank, household spending increased for the third straight month in June, rising by 0.3 percent after previous increases of 0.4 percent in both April and May. Source: Getty / Traceydee Photography

The annual trimmed mean inflation — which doesn’t include major price swings and is the RBA’s preferred measure — was at 2.4 per cent, down from 2.8 per cent in April.

Morningstar chief investment officer for the Asia Pacific, Matt Wacher, said falling inflation means Australians could be feeling more confident about spending money.

“In real terms, adjusted for inflation, household incomes are actually growing again in real terms, which they weren’t for quite a period there,” he said.

“That kind of makes people feel that there’s a bit more money in their hip pocket when they’re actually earning more than the inflation rate again.”

Wacher said that the savings rate — the percentage of their income Australian households are able to save — has rebounded since a low of about 1.5 per cent in September 2023.

In the March quarter it rose to 5.2 per cent, according to the Australian Bureau of Statistics.

Reasons for optimism, or a crisis still ‘far from over’?

Further argument for optimism in the economy is the fact the RBA is likely to lower the official cash rate even further, Wacher said.

“The market is still pricing in four rate cuts over the next 12 months, and that would certainly have a very large effect if that was to come through on consumer balance sheets,” he said.

But Australians aren’t necessarily going to feel like they are out of the woods, the Australia Institute’s senior economist, Matt Grudnoff, said.

“People are likely to still be feeling the pinch,” he said.

“When people talk about inflation easing, they don’t mean that prices are going backwards, they just mean that they’re not increasing as fast as they once were.”

Grudnoff said Australians with mortgages haven’t changed their behaviour significantly since the RBA started introducing rate cuts.

“Around 80 per cent of people haven’t adjusted their repayments [since the cute were introduced],” he said. “So effectively, rather than taking the extra money, people are just paying down debt faster, which suggests that they’re not increasing their spending in response to this cutting interest rates, which tells me that they’re still quite worried and uncertain about the future.”

Pedestrians walking past the Reserve Bank of Australia building in Sydney.

Australians with mortgages haven’t changed their behaviour significantly since the RBA started introducing rate cuts, according to economist Matt Grudnoff. Source: AAP / Bianca De Marchi

When people are uncertain and worried about the economy, “their first reaction is to kind of pay down debt and get ahead in order to build a buffer against any future kind of shock,” he said.

“If unemployment is going up, people might be worried about their jobs. The economy’s growth is almost flat so they’re worried about their jobs and if they’re uncertain and worried, they’re not going to be rushing out and spending on discretionary items.”

Australian Council Of Social Service CEO Cassandra Goldie said the cost of living crisis is “far from over”.

“There are persistent cost pressures that are placing people on low incomes under enormous financial stress,” she said.

“Housing affordability has continued to deteriorate, while rental stress has become more persistent and is damaging people’s health.”