Workers Face Inflation as Markets and Debt Grow

Australian home borrowers paid a record A$21 billion in interest in the three months to June. People without mortgages have faced rising rents, while households grapple with higher fuel and food costs. The Reserve Bank of Australia is weighing further interest-rate increases against the damage they could do to jobs and economic activity, as oil prices rise amid the war against Iran and expanding conflict in the Middle East.

Who Pays for the Shock

Oil finished the previous week at US$106 a barrel. Senior RBA sources said prices showed no sign of falling as the war spread to Saudi Arabia and the Gulf of Aden. The bank’s forecasts, due next month, had assumed oil prices as much as US$20 a barrel lower.

Diesel prices have climbed to around their level at the start of the Russia-Ukraine war, adding costs across transport, manufacturing and food production. Australian inflation rose 0.4 per cent in August; it would have fallen that month if petrol prices hadn’t risen. Liquefied natural gas prices are about US$28 per unit, more than double their pre-war level.

Food prices have also risen, driven by higher oil and fertiliser costs and this year’s “super” El Niño. Wheat prices have climbed 37 per cent this year, soybeans 24 per cent, sugar 42 per cent and cocoa beans more than doubled.

RBA governor Michele Bullock and senior RBA researcher Anthony Brassil described the conflict between controlling inflation and protecting employment in their account of the bank’s dual mandate. “If prices are rising faster than nominal incomes, households experience a direct loss of purchasing power. At the same time, weaker activity may mean that unemployment and underemployment are already increasing,” they said. “The costs on both sides of the mandate are then visible together, and monetary policy cannot eliminate the real economic loss caused by the shock. It can only influence how that loss is distributed over time.”

The RBA’s official interest rate is 4.6 per cent, a 15-year high. Unemployment reached a five-year high of 4.7 per cent in September. After weaker job figures, markets cut the perceived chance of an increase to 4.85 per cent at the November meeting from about one in three to about one in five.

The bank’s leaders also said high inflation makes planning harder and “tends to impose the most significant burdens on households with limited financial buffers.” Most borrowers remained ahead on repayments, with many holding large balances in offset mortgage accounts. Low-income people without mortgages have faced higher rents over the past three years.

Markets, Debt and Reform

An ASX study based on a survey of almost 4,500 people found 39 per cent of adults owned shares, exchange-traded funds or other listed investments outside superannuation. About 2.8 million Australians own ETFs, roughly double the number in 2020. The industry manages about A$388 billion and was expected to approach A$400 billion as more money flowed in.

Jarden described a “sustained and dramatic” shift in the share registers of major banks over the past three years, with “mum and dad” investors playing a smaller role as passive funds, including superannuation money, expanded. Jarden analyst Matthew Wilson said index funds buy more of the largest companies, including CBA and BHP, potentially lifting their prices. “The more you buy, the more they go up, so the more you buy,” he said. “You create this loop that feeds on itself.” He said passive investing had stretched CBA’s “fundamental valuation.”

State government debts have more than doubled since 2019, according to a Grattan Institute report. Interest on state debt had doubled to 0.6 per cent of annual economic output and was likely to double again; borrowing costs to fund deficits had risen roughly four-fold since immediately before COVID. The federal government remained in structural deficit.

Grattan proposed raising the goods and services tax from 10 per cent to 15 per cent, taxing fresh food and considering the removal of exemptions for health and education. It said the changes would raise an additional A$76 billion annually: about A$33 billion would fund income-tax cuts, particularly for low- and middle-income earners; about A$25 billion would increase welfare and rent assistance and reduce poverty; and A$18 billion would go to states facing rising health costs. Grattan also recommended ending the 2018 GST allocation deal with Western Australia, saying that would free A$6 billion for the federal budget.

The report called for spending and revenue reform, but political support was uncertain. Anthony Albanese rejected suggestions that the government abandon Western Australia’s favourable GST distribution. Other contested proposals included reducing National Disability Insurance Scheme spending, limiting tax minimisation through trusts, and reversing negative-gearing and capital-gains-tax concessions. Treasurer Jim Chalmers said: “Power is much more effective right now in the distorting and blocking than the building or reforming.”

Workers and the Climate Transition

A survey of 2,048 working Australians found 97 per cent believed large companies had at least some responsibility to act on climate change. More than half said their employer had made a public climate commitment, but only one in seven thought it was making good progress.

Sixty per cent favoured a gradual transition away from mining and fossil fuels, with strong support for affected workers and communities. Almost four in five respondents thought greenwashing was at least somewhat common among Australian businesses. Eighty-five per cent said they would trust an employer’s climate claims if disclosure were required by law and misleading claims carried penalties; 79 per cent would trust independently audited claims.

If they learned their employer was performing poorly, 71 per cent would discuss it with colleagues and 49 per cent would raise it with management. The report’s author, Astghik Mavisakalyan, urged companies to involve workers in transition planning and independently verify climate claims. The survey found 84 per cent of workers would accept workplace changes to reduce emissions if employers demonstrated strong commitments and verified progress.