[Theme Music Starts]

SCOTT:

From Schwartz Media. I’m Scott Mitchell, filling in for Ange McCormack. This is 7am.

Australia is not out of the woods on the cost of living crisis – prices are still rising too fast.

Last week, the RBA were so concerned about this, they went back to hiking interest rates, saying it’s the only way to slow down the spending that’s pushing prices higher.

But who is doing all the spending? And how do they have money to throw around?

Today, national correspondent for The Saturday Paper Mike Seccombe, on the big spenders who are causing economic pain for the rest of us.

It’s Monday, November 13.

[Theme Music Ends]

SCOTT:

Mike, last week the Reserve Bank changed course and decided to raise the interest rate by a quarter of a percent. What was the RBA's reasoning?

MIKE:

Well you're right, it was a course change. The cash rate had been on hold for five months at 4.1% and they decided to jack it up by another point 25, 25 basis points. The rate rise, though, had been pretty widely anticipated by economists and I think you could say it had been kind of flagged by the new RBA Governor Michelle Bullock as well.

Audio excerpt – Michelle Bullock:

“Our focus does remain on bringing inflation back to target within a reasonable time frame, while keeping employment growing. It's possible that this can be done with the cash rate at its current level, but there are risks that could see inflation return to target more slowly than currently.”

MIKE:

She's been sending some signals to say that the RBA was ready to hoist rates again if inflation didn't slow, and inflation has actually picked up a little bit in the most recent three months.

Audio excerpt – Reporter:

“Prices rose 1.2% in the September quarter, an acceleration from the 0.8% increase in the June quarter, and that leaves the annual rate of inflation at 5.4% lower than the 6% recorded in June…”

MIKE:

In a statement, she said that, and I'm quoting here, “Inflation in Australia has passed its peak, but it's still too high and is proving more persistent than was expected a few months ago". What she said was that there had been, quoting again, “some easing in the price of goods, but the prices of many services continued to be rising briskly". That was the word she used, ‘briskly’.

SCOTT:

So why are those prices rising so ‘briskly’ - as the RBA put it?

MIKE:

Well, let me quote another economist of note, Danielle Wood, because she put it quite bluntly in a speech she gave a little while back. Prices are rising because some Australians continue to, as she put it, ‘live large’.

More specifically, people with money, and older people, which are increasingly the same thing over time, continue to spend up pretty big. Baby boomers are spending on all sorts of non-essential things. Meanwhile, other Australians, typically younger Australians, less wealthy Australians, are struggling to afford the essentials. You know, food, accommodation, power bills, those sorts of things. So Danielle Wood, who this week has taken over a new gig as chair of the Productivity Commission, portrayed the unfairness of it all in great detail in this speech.

Audio excerpt – Danielle Wood:

“And some will argue that young people have never had it better. But survey after survey shows that young people are struggling with the economic hand they've been dealt.”

MIKE:

And she presented the data basically, and those numbers showed very clearly who is getting squeezed and who's doing all the spending that the RBA is trying, not terribly successfully to date, to curtail.

Audio excerpt – Danielle Wood:

“Younger people have less economic fat to buffer them against the current rise in real living costs.”

MIKE:

So one of the ways she went about it was she looked at credit data from the Commonwealth Bank, where they had taken debit card and credit card transactions from 7 million customers and correlated that spending with age. And what it showed was, when she compared the first quarters of 2022 and 2023, that the spending rate for people aged under 55 was growing much less than the inflation rate, meaning they were cutting spending. For people aged 25 to 29, spending had barely grown at all, even though, you know, inflation was rattling along. So younger people were really reining it in. But among over 50 fives, their spending increased much faster than the general rate of inflation.

Audio excerpt – Danielle Wood:

“Over 55’s are living large, as the kids say. Per capita spending has significantly outpaced inflation. Younger people's real consumption has substantially shrunk over the same period, and those declines have been...”

MIKE:

For those aged 75 plus it was almost twice the rate of inflation. So that really, I think, paints a picture of the intergenerational equity. Yet, of course, the latest interest rate rise, just like all the rises before it, will hit these younger people the hardest ,because they tend to be the ones with mortgages or paying rent or with young families that they have to feed. And, you know, all of this brought to mind, for me anyway, an old Chinese proverb, Kill the chicken to frighten the monkey. Meaning you make an example out of one in order to deter others. And the one that you make an example of tends to be innocent. In this case, the ones being killed, the sacrificial chickens in terms of the old proverb, those are the Australians who are struggling, who as I mentioned, are typically younger and poorer Australians. So they're being hurt the most. Meanwhile, older people, people who for example own their own houses and have no mortgages, they're not doing so badly at all.

SCOTT:

Right. So if it's these older Australians who's spending is actually driving inflation at the moment Mike, just as everyone else is tightening their belts, is that intergenerational inequality actually getting worse right now?

MIKE:

Well, yes, And you're right about the longer term problem of intergenerational inequity. Inequity in general, but particularly intergenerational. Of course, Danielle Wood set this out as well. What was interesting about her analysis was that it didn't stop just at recent spending patterns since inflation's begun rising. It went to changes in the patterns of wealth and spending, going back several decades.

Audio excerpt – Danielle Wood:

“In the pre-COVID world, the growing cost of essentials, particularly housing, meant that younger people had increasingly orientated their consumption bundled towards essentials. Indeed, if we look at the period from 1989 to 2016, non-essential spending actually shrunk for young people in real terms.”

MIKE:

And essentially, the pattern that we are seeing of growing inequality has been ticking along for decades. It was supercharged by the pandemic, where some people came out of lockdown with big excesses of savings to spend. And then, of course, we've had 18 months of very rapid interest rate rises, which has further exacerbated the inequality.

The most obvious example, of course, is housing.

SCOTT:

Coming up, why house prices are behind our inflation problem.

[Advertisement]

SCOTT:

So Mike, we've been talking about intergenerational inequality and, over the decades, we've seen that play out in housing most of all. But how has housing also led to this difference in how people are spending money right now?

MIKE:

Well, Danielle Wood went back, like I said, over several decades and took the year 1981 as one of her reference points. That's because 1981 was back when the baby boomers, people like me, I'm afraid to say, were settling down and having families and buying houses. And at that time, more than two thirds of people in the 30 to 34 age bracket owned their own home. In fact, it was, I think, 68%. Now that number is less than half of people in that age bracket, I think it's 49 and probably falling even since I last looked at the data. Wood point out that all the way up until the 1990, increases in house prices had broadly tracked along with growth in income. So, your income went up, your house price went up. It was pretty much a wash. But then something changed. And between 1992 and 2018, house prices grew at almost three times the pace of wages. Over that time, the median house price increased 412%. The median unit price went up 316%. So what this means, of course, is younger cohorts of people have been forced overtime to spend ever more on essentials, particularly housing, buying or renting, doesn't matter. And as a result, they've had less to spend on other things. So over more than three decades, discretionary spending by younger Australians has declined in real terms, even before the latest crisis. So there's a series of interconnected events that have led to this pretty dire situation at the moment.

SCOTT:

So Mike, does that big rise in the value of homes we’ve seen also mean that these wealthier, older people who own their homes already... they're spending more at the moment and we actually need house prices to drop, if we want them to spend less?

MIKE:

Well. It would certainly help if house prices declined or at least stopped rising because there's something called a wealth effect, which is that if your assets are rising in price, you feel richer, you're more inclined to spend. So that's the way that works. So, one might have thought that as interest rates rose, it might cause real estate prices to drop. But that hasn't happened, or at least they dropped briefly but they're now shooting up again and they're back to where they were before it started rising and they're continuing to zoom. What has happened, though, is that we are seeing fewer houses being built. I spoke with the chief economist of the Housing Industry Association,Tim Reardon, who made the point that many economists make, that what caused the rapid rise in inflation was global supply shocks in the first instance, and improvements in those global supply chains are causing it to come down. And of course, the housing industry was particularly severely affected by this. I mean, if you looked at the data coming out, it was building products that were going up most steeply for most of the past year. So, he put it to me quite simply, if you make homes more expensive, you get fewer of them, which is a big concern if you're looking to buy or already have a mortgage. And it's an even bigger concern, of course, if you're a renter, because rents have risen well above the general rate of inflation over the past year or so. There doesn't seem to be any sign that that will ameliorate in the near future. So, the central irony here is that by increasing rates again this week, the RBA has only exacerbated the gap between young and old because while those higher rates are a problem for those with debt, they're not so much of a problem for those with interest earning assets because they get higher returns on their savings. You know, it's not so much of a problem if you don't have a mortgage. It's not so much of a problem if you have a big pool of superannuation savings that you can dip into, which of course a lot of retirees do. So, yes, inequality on the march.

SCOTT:

And finally Mike, the RBA is in a tricky spot here. They can use interest rates to address this problem, but things we're talking about are really the responsibility, ultimately, of sort of government policy. Just how significant is this going to become politically?

MIKE:

Well, you're quite right. Interest rates are a very blunt instrument, right? And as we can see, they're not particularly well targeted. You're right again, it is becoming a big political problem. And one of the people I spoke to was Craig Emerson. He was an economic adviser in the Hawke government. He was a senior, former senior minister, during the last Labor government, including being trade minister. He's an economist by training. And so he sees it from both a political and economic standpoint, I guess. And what he said to me was that politically this is becoming a huge issue. Those were his words, huge issue. His view was that it would be likely that this would lead to more people moving their support to the Greens because with their advocacy of rent caps and their insistence on greater government spending on social and affordable housing he says the Greens continue to talk the language that people want to hear. Which is to say that even if individuals don't necessarily support the specifics of, for example, a rent freeze, they at least see the Greens as being concerned about the problem, which they also see as having been created by the major parties. One thing I should say is that the Albanese Government has made some moves to try and reduce cost of living pressure on households. You know, it's increased Medicare benefits, for example. It's done some things on, on energy prices, which they say will reduce the pressure, but without adding to inflation. But a lot of people say, more needs to be done, specifically to rein in spending by those who have money.

But of course, that's not what the government's doing. And Emerson's take on that was that the reason government isn't doing it is because it would be unpopular. You know, people out there who who are struggling with cost of living pressures would go, hang on, I'm already struggling here and you're taking money out of my disposable income, out of my pay packet. Emerson's view was that neither of the major parties would come at that. So we're left in an unfortunate situation where we basically wait for inflation to come down, partly of its own because of supply constraints easing, and partly because after a while, interest rates will crush consumption by some people, enough that on average it comes down.

So the unfortunate thing here, in my view, is that instead of doing something to rein this in, instead the government plans to press ahead with its stage three tax cuts, which will overwhelmingly benefit high income earners who, as we've said, tend to be older.

The possibility is, of course, that that would further stimulate demand. And of course, the government's hope then has to be that this doesn't force the RBA to sacrifice more chickens.

SCOTT:

Mike, thank you so much for your time.

MIKE:

Thanks, Scott.

[Advertisement]

[Theme Music Starts]

SCOTT:

Also in the news today…

Aid organisation Médecins Sans Frontières, issued a statement over the weekends, saying patients and medical staff in Gaza were trapped in hospitals and under fire.

The Al-Shifa hospital, the largest in Gaza, was struck by Israeli bombardment to its maternity and outpatient departments, resulting in multiple deaths and injuries – according to the aid agency.

An Israeli spokesperson said hospitals must evacuate so that its forces can deal with Hamas.

And,

Shipping ports around Australia are expected to remain closed for several days after a cybersecurity incident.

The Australian Federal Police and several intelligence agencies are investigating the incident, which was detected by the company that manages container terminals at many major Australian ports.

I’m Scott Mitchell, this is 7am and I’ll be seeing you for the next couple of days.

[Theme Music Ends]