Expect year of pain as costs skyrocket and supply falls

MORE pain could be on the way for stretched household budgets, with analysts predicting a big increase in costs over the next 12 months.

Retail analysts at Barrenjoey have published a report outlining how surging petrol prices and rising interest rates are likely to have the greatest impact on household finances in 2022-23, followed by spiralling gas and electricity prices.

Barrenjoey’s calculations, which also consider rent, insurance and food costs – all tipped to rise by 5 per cent in 2022-23 – point to a 13 per cent increase in the cost of living next financial year.

“Our analysis shows that the cost of living – housing/loan interest, rent, petrol prices, energy, insurance and food – which accounts for $45,000 per household, will rise 13 per cent in FY23,” the report says.

“The $450bn consumers saved through Covid is skewed towards high income households. This means the middle and lower income cohorts will likely face significant challenges.

“While most consumers will likely face faster wage growth in the year ahead, we do not think it will be enough to offset growth in households’ expenses. We can’t think of a time in the past 15 years when the consumer macro-outlook has looked more challenging.”

The official inflation rate hit a 20year high of 5.1 per cent in March, and the Reserve Bank quickly responded by lifting the cash rate by 0.25 per cent in May and a further 0.5 per cent in June to 0.85 per cent.

Factoring in further rate rises expected over the coming months, Barrenjoey expects mortgage costs to surge by 53 per cent in 2022-23.

Household petrol costs are expected to increase by 36 per cent, based on the assumption that prices will stay about $2 a litre. However, the end of the temporary fuel excise cut in September is expected to push prices even higher later this year.

Meanwhile, gas supply shortages on the east coast and higher wholesale electricity prices are expected to drive energy costs 14 per cent higher in 2022-23.

Barrenjoey’s forecast of a 5 per cent increase in food costs could be seen as optimistic, with the cost of lettuce, broccoli, beans and other fruit and vegetables skyrocketing in recent weeks due to a wetter-than-average start to the year and flooding in southern Queensland. The Ukraine war has driven up wheat prices and continues to threaten global supplies of bread, meat and eggs.

The gloomy inflation forecast has sparked a share sell-off and plunged consumer confidence to levels last seen during the early stages of Covid-19 two years ago.

The Westpac-melbourne Institute Index of Consumer Sentiment fell 4.5 per cent to 86.4 in June, and Westpac chief economist Bill Evans attributed the slump to inflation and the prospect of aggressive interest rate hikes.

“Over the 46-year history of the survey, we have only seen index reads at or below this level during major economic dislocations – during the height of the pandemic, the GFC, and in the severe downturns of the early 1990s and in the mid and early 1980s,” he said.

“Those last three episodes were associated with high inflation, rising interest rates and a contracting economy – a mix that may be threatening to repeat.”