Higher interest rates are making households spend more on mortgage repayments. Higher interest rates are also being used as an excuse by landlords to increase rents. Higher interest rates are also likely to discourage the building of new houses, constraining supply and further pushing up house prices and rents.
For all the talk about the need to boost housing supply, there’s not much discussion of the contradiction between the government’s goal of increasing housing investment and the RBA’s goal of reducing it.
Increasing interest rates might be justified by some if the higher interest rates were significantly reducing inflation. Unfortunately, higher interest rates are not likely to have a big impact on the type of inflation that Australia is currently experiencing.
Cause of current inflation
The recent surge in inflation was initially caused by a number of supply shocks. Firstly, clogged supply chains as the world economy emerged from COVID lockdowns. Then climate change weather related events that impacted the supply of things like fruit and vegetables. Finally, increased energy prices caused by the sanctions imposed on Russia because of its illegal invasion of Ukraine.
These initial increases in prices should have been temporary. As the shocks subsided, prices should have stopped rising. But these shocks have been used as cover by businesses in Australia and around the world to increase their profit margins. This ‘profit push’ inflation has been dubbed‘greedflation’.
As the supply shocks started to hit in the middle of 2021, there was a lot of talk about how prices were going to increase. After almost a decade of subdued prices, consumers were being actively primed to expect price increases. Businesses, particularly large businesses with significant market power, used consumers’ expectations that prices would rise as cover to increase prices by more than their costs had increased. The strategy was as simple as it was profitable.
There is now a
