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The RBA’s November rate decision might not have come as a surprise to everyone - and the bad news is we’re probably in for more interest rate shocks.

Whether the Reserve Bank lifts the cash rate again  - as it might well do next month - or banks raise their home loan interest rates out of cycle anyway - as three of the big 4 did in October - the gift of stable interest rates is one that tops most mortgage holders’ wish lists this season.

So will the RBA be on our naughty or nice lists this Christmas?

The Cost of Inflation: what it really means for you

You’ve probably heard a LOT about ‘headline inflation’ lately. Often on news shows in big economy talkfests that seem to end up in big cost increases for our mostly-regular-sized household budgets.

So before we get into the good news (yes, there is some) and what you can do right now, let’s quickly do an explainer as to why inflation is spooking the Reserve Bank and why the average Aussie is taking the biggest hit.

The main reason inflation is causing us all such budgetary headaches, is because it’s too high. In the words of Reserve Bank of Australia (RBA) Governor Bullock on Melbourne Cup Day:

“...while goods price inflation has eased further, the prices of many services are continuing to rise briskly. While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025. The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”

Note: The CPI stands for ‘Consumer Price Index’.

What does this mean in non-banker English?

• The RBA aims to keep inflation between 2-3%, in order to keep our economy ticking over relatively smoothly. Higher inflation means higher prices for longer, and lower living standards for all. The RBA is determined to avoid this becoming embedded in our economy long-term.

• This is the ideal range at which interest rates are likely to stabilise - and we’re not likely to get there for another 12 months at least. 

• At the moment, inflation sits at 5.4%.

The RBA Governor's statement came as the RBA lifted the cash rate for the thirteenth time since May 2022. This sparked another cost of living ‘ouch’ as mortgages, rents, and other associated costs rose correspondingly around the country. 

The Good News:

Inflation is coming back down. It stood at 7.8% in December 2022, and has fallen steadily since. It’s not coming down as quickly as the RBA would like, but it is moving in the desired direction. Some of the living costs slowing the fall of inflation include:

• Fuel costs

• Energy prices

• Rents

But one of the biggest contributors to the stickiness of the inflation numbers is what the RBA have termed ‘services inflation’. 

This is the cost of being served in a cafe or checked out of a supermarket - and it’s not easy to control in an environment with low unemployment and high demand for services, and the workers who deliver those services.

There are other actions the current government could undertake to better manage inflation costs, and they haven’t done this. 

There’s also quite a bit the banks and APRA could do too, but let’s not wait around for miracles. Sometimes you have to be your own Santa.

So, what can you do about it?

According to economists and bankers everywhere, we should be ‘belt-tightening’ as much as possible. This applies to everyone, not just you, but there’s not much we can do about government spending, or international money markets.

Keep your focus on you and your household. After all, that’s the budget that really matters - and it’s the one you can definitely impact. Interested in some ideas for driving down your living costs?

Take a look here at our article on saving over $6000 on the family budget. There’s probably a few ideas that can make a difference.

The less we spend, the faster inflation falls, and the more stable our interest rates are likely to be. 

The bottom line:

So, what will it take to stabilise rates? It’ll take at least another year of these higher rates. Sadly, Santa seems to be on a budget too this year.