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During an Australian Business Economists dinner, RBA governor Michele Bullock emphasized that Australia's inflation is primarily driven by domestic factors, indicating a significant gap between aggregate demand and aggregate supply.
The release of Commbank IQ's data revealed a noteworthy discrepancy in spending patterns among different age cohorts. Older Australians, aged 70 or above, displayed an increase in spending higher than the inflation rate during the year leading up to September 2023. On the other hand, younger Australians, specifically those under 40, noticeably reduced their spending. Interestingly, Australians aged 65-74 spent more in September than those in the 30-34 age group.
This data raises concerns from a monetary policy perspective. Older Australians, who tend to spend more on discretionary items, are largely unaffected by the RBA's aggressive monetary tightening measures, as they primarily focus on mortgage holders. Additionally, older Australians benefit from higher interest rates on their deposits and are protected from rising inflation through automatic indexing to the Consumer Price Index (CPI).
This leaves the RBA in a precarious situation where they are implementing measures to slow down demand and inflation that mainly affect one-third of Australians with mortgages, while older Australians continue to stimulate demand through their substantial spending.
Unfortunately, as a result, the RBA will likely have to further increase interest rates, which will disproportionately impact younger Australians. They are already experiencing significant cutbacks in both discretionary and essential spending.
The data clearly highlights the need to address inflation by curbing the spending habits of baby boomers, rather than solely focusing on younger Australians who have already made substantial cutbacks. Both the RBA and the federal government will need to consider proactive measures in tackling this issue. Additionally, it is imperative for the government to reevaluate high levels of net overseas migration that contribute to increased consumer demand.
Published:Tuesday, 28th Nov 2023
Source: Paige Estritori
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