Inflation and cost of living is seeing divide or rich and poor grow

In the opening lines of the iconic 19th Century novel A Tale Of Two Citiesauthor Charles Dickens paints a picture of greatly disparate outcomes, that it was both, “The best of times and the worst of times,” simultaneously.

Despite being more than two centuries removed from the late 18th Century Parisian and London landscapes, Dickens’ words capture in a lot of ways the current state of Australia’s society and economy.

For some Australians life has scarcely been better. There are some demographics enjoying the strongest wages growth in more than a decade, while others have feasted on the bounty of asset price appreciation provided by cheap money from central banks and government stimulus programs.

For others, things are looking the most dire they have in decades as struggling households battle the rising cost of living, amid the largest destruction of household spending power in more than 30 years.

While conventional wisdom and historical precedent would suggest these two outcomes on this scale would likely be mutually exclusive, in a strange twist of fate the pandemic and government, and central bank intervention, they are both very much accurate for different demographics.

The worst of times

In recent months, consumer confidence has seen some of its lowest readings in decades, excluding the initial shock of lockdowns at the start of the pandemic.

Across the various questions in ANZ’s consumer confidence survey, Australians are feeling dour about the present, the future and the likelihood of them purchasing a major household item.

Despite the consistent stream of positive economic headlines, from robust GDP growth to near record high job indices, it would seem inflation and other factors are weighing them down more than these other factors are lifting them up.

Considering that Australian households have seen the largest destruction of inflation purchasing power since immediately comparable records began 25 years ago, it’s understandable why so many people feel this way.

The loss of purchasing power from inflation can be an insidious thing.

Rather than a big obvious hit like from a rise in taxes or a pay cut, paying an average of 6.1 per cent more for pretty much everything you buy from the groceries in your supermarket trolley to the shirt on your back, the hit is more gradual and in some cases more painful.

The best of times

Despite the downbeat mood of consumers, retail sales figures are showing little sign of a downturn.

Prior to the pandemic retail sales weren’t growing much faster than inflation, at around 2.5 per cent on an annual basis during 2019. As of the latest data release, annual retail sales are growing at 16.5 per cent.

For the month of July alone they recorded 1.3 per cent growth, more than half the annual nominal growth in sales recorded during much of 2019.

While it’s worth noting that part of this meteoric rise has been driven by inflation, due to headline retail sales measuring nominal, on a year on year basis prices retail sales are growing at a rate more than 10 per cent higher than inflation.

Perhaps the brightest factor in all of this is the nation’s labor market.

In July, a larger percentage of Australians in the labor force had a job than at any time since comparable records began almost 50 years ago.

While the unemployment rate ticked up slightly in August from a low of 3.4 per cent to 3.5 per cent, it was as a result of more people choosing to re-enter the labor force rather than jobs being lost overall.

During August, the economy created 33,500 jobs in net terms, including 58,800 full time jobs being created, while 25,300 part time jobs were lost.

The outlook

Under more normal circumstances the economy and various demographics tend to move in the same direction, albeit to different degrees. But with the advent of the pandemic and the drastic changes to consumer psychology that resulted in two very different Australian economies having emerged.

In one world, retail spending is rocketing along, wages growth is relatively strong and the drive to spend is arguably stronger than ever, after spending two years going in and out of lockdown.

In the other, some households are already being driven to the wall by rising interest rates and rocketing rental costs, and facing the largest decline in inflation adjusted living standards in more than a quarter of a century.

Ultimately, for some Australians it is the best of times, for others it really is the worst, with both being simultaneously true. One would imagine that in time, the economy will end up in one column or the other, we’ll just have to wait and see which one.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

Originally published as Aussie divide of rich and poor gets deeper and more painful

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