Inflation impacts

Three UQ Business and Economic experts share insights on housing, investment and wages growth

Image credit: Adobe Stock / Bits and Splits

Image credit: Adobe Stock / Bits and Splits

Inflation in Australia is officially at its highest level in more than 20 years, confirming the price hike people have been experiencing at supermarkets, service stations and in the housing market.

Why does the jump in inflation matter, and how will it impact Australians over the coming months and years? How much will interest rates increase, and how will that flow on for renters?

UQ Business and Economics researchers share their thoughts on inflation issues, including the housing and rental market, investment decisions and wage growth ahead of the federal election.

Housing affordability is creating financial pressures for families

Professor Shaun Bond, Frank Finn Chair of Finance and Finance Discipline Leader at UQ Business School

Professor Shaun Bond

"Construction costs on new homes and large rental increases are two of the main drivers pushing up the cost of living for Australian households. There are many different factors driving these price increases but almost all are due to the pandemic’s economic upheaval. 

"In the case of surging rental prices, there are no easy answers for those families struggling to find accommodation. Strong interstate and interregional migration has led to a rapid inflow of new residents, and the supply of new homes has not kept up with demand given the rapid movement of people who are no longer tethered to main employment centres.

"The supply of new homes has also been impacted by construction supply chain problems and a critical labour shortage. Landlords have also sold rental properties in the face of strong buyer demand, further reducing the number of rental properties."

"It is expected some price pressures will moderate in coming months. Already, house price growth appears to be slowing in Sydney and Melbourne as affordability constraints limit buying activity. The Reserve Bank interest rate increase will further slow buying activity and take some of the heat out of the construction sector.  Population growth pressures may also ease as rental shortages limit the appeal of moving and a strong job market keeps people in the major cities."

Professor Shaun Bond from the University of Queensland Business School

Professor Shaun Bond

Professor Shaun Bond

Dr Min Zhu from from the University of Queensland Business School

Dr Min Zhu

Dr Min Zhu

Making investment decisions

Dr Min Zhu, Senior Lecturer in Finance at UQ Business School

Dr Min Zhu

"The question of why inflation has increased and whether it will stay high is subject to debate.

"Some believe the recent surge in inflation is a precursor to a long time period of high inflation, while others believe it is another casualty of COVID and will dissipate over time."

"People’s beliefs will play a key role in your asset decisions. If Australians expect high inflation in a foreseeable future, they should be shifting holdings away from financial to real assets.

"People should also tilt equity portfolios towards small cap stocks and profitable companies with more pricing power and reduce holdings on tech and unprofitable companies. If, on the other hand, people believe that high inflation is only transient and the market is overly worried, maybe now is a bargain time to buy stocks, especially larger cap and high growth stocks."

Target rate for wages growth is needed

Professor John Quiggin, Senior Economist at the School of Economics

Professor John Quiggin

"A 5 per cent annual rate of inflation is not, in itself, a major problem. It has become evident that very low rates of inflation can be just as damaging as high inflation, by not allowing the Reserve Bank room to cut interest rates far enough when the economy is depressed.

"The 2-3 per cent target adopted in the 1990s made sense as a way to break the inflationary expectations built up over previous decades, but is now clearly too low. If inflation targeting is to be retained as a policy, the target should be raised to 4 per cent.

"What is really needed though is a target rate of growth for wages, which have been stagnant for years and have lagged far behind prices in the recent upsurge."

"Wages should be increasing by 6 per cent a year, at least for the next couple of years. Achieving this will require not only caution in raising interest rates but the repeal of decades of industrial relations legislation explicitly designed to hold wage growth down.’

Professor John Quiggin from from the University of Queensland School of Economics

Professor John Quiggin

Professor John Quiggin

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