The Inflation Conundrum: Unravelling its Causes and Consequences (Ep. 217)

Previously known as “The Property Planner, Buyer and Professor”

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Highlight segments:

2.25 – Property prices rising, rate to stay on hold

5.56 – Why inflation is required

9.52 – Productivity at its lowest level in 30 years

14.27 – Unit labour costs rising faster than ever

19.22 – What is the level of unemployment and interest rates we need to maintain inflation within the target band?

35.16 – Gold Nuggets


Show notes:

In this special podcast episode, hosted by Mike, the trio delves into the concept of inflation, shedding light on its impact and the terms frequently heard in the news. Dave explains how wages growth plays a significant role in the picture, and the Reserve Bank of Australia (RBA) aims to engineer wages growth to surpass economic growth (inflation). This is believed to improve the standard of living as income outpaces the cost of goods and services.

Bringing economic growth back into the target band is a delicate balance as our RBA aim to avoid a recession and aim for a ‘soft landing’, as Mike puts it.

Inflation and the Consumer Price Index (CPI):

Inflation, also referred to as the Consumer Price Index (CPI), reflects changes in the pricing of all goods and services in the economy. When someone mentions CPI, they are actually referring to the rate of inflation.

Causes of Inflation:

There are several factors contributing to inflation, and these are the four key ways observed in current times:

1 Monetary Inflation: Occurs when there is an increase in the money supply, leading to inflation if the production of goods and services fails to keep up with the rising money supply. Central banks, through their monetary policies, often influence this factor. During the COVID period, massive government stimulus, money printing, and reduced interest rates were prominent examples.

Historically inflation has sat at 2.5%, although our inflation levels prior to 2021 were particularly low. In fact, as Dave points out, inflation was concerning on the ‘low side’ at this time. Productivity was the key concern at the time, and for six years our RBA held rates at very low levels to stimulate spending.

Dave walks listeners through the hefty rate of inflation increases that we’ve been experiencing for the past 18 months and Cate points out some important context about other previous low interest rate periods.

Mike quizzes Cate on her experience as an investor spanning more than two decades and Cate shares her teenage memories about the 1988/1989 impact on her family during a really tough economic period.

Mike tackles some of the pressures the RBA face in relation to fiscal policy (government) vs monetary policy (the bank). Dave shares with our listeners some of the ways that our government influenced the economy, particularly through the COVID period. From quantitative easing to the provision of the funding facility to the lenders, over-stimulation is now the issue that the RBA are now tackling.

Cate steps through CPI from the chart below and she sheds light on some of the non-permanent inflationary pressures, and also those that can be attributed to external factors such as the Ukraine invasion and COVID lockdowns.

Mike touches on “YOLO”, (you only live once) challenges following the lockdown and concedes that our appetite for lifestyle experiences such as travel are working against the RBA’s actions to tame inflation. As Dave coins it, “Revenge Spending”.

2 Cost-Push Inflation: This arises when the cost of production, such as wages and raw materials, rises, and businesses pass on these increased costs to consumers in the form of higher prices. The COVID period saw supply chain disruptions, labour shortages, and geopolitical tensions contributing to increased costs of supply.

The prices of goods increased strongly as retailers pass through the costs associated with supply chain disruptions and higher shipping prices which are now starting to subside.

Meanwhile, the cost of building a new house – the largest component of the CPI basket – increased at its fastest rate in more than a decade due to a boom in construction activity (due to government stimulus for building new dwelling and renovations for the first time ever) and record inflation in building material prices.

3 Demand-Pull Inflation: Occurs when the demand for goods and services exceeds the available supply, resulting in higher prices. The increased demand for services, stimulated by factors like stimulus packages, personal savings, rising property values, and the desire to travel, was a significant concern for the RBA in March 2023, where services annual inflation recorded its largest annual rise since 2001 

“This happened due to all the stimulus, increased personal savings, growth in property values and desire to travel again and revenge spend that happened in 2022 and into 2023.”

4 Expectations: If people anticipate higher future prices, they may adjust their behaviour by demanding higher wages or raising prices, thereby contributing to inflation.

“This is the final phase that the reserve bank is very wary of which leads to a wage price spiral, entrenched expectations for prices, especially for services to continue to rise at this faster rate”, says Dave.

Mike shares a frightening example of post WW1 hyper-inflation in Germany. Four to five marks to the US dollar increased to a trillion marks to the US dollar. Mike regales some other horrendous real-life stories.

Cate and Mike chat about the impact of a high-inflation environment, from stagflation to vulnerability for those who don’t own assets. Cate talks about the contingent who aren’t likely to be negatively impacted by inflation.

Economic Impact of Inflation:

While moderate inflation is considered normal for a healthy economy, high or hyper-inflation can have adverse effects, including:

  1. Erosion of Savings: High inflation diminishes the value of savings in relation to the cost of goods, services, or asset prices such as housing.
  2. Reduced Purchasing Power: As the value of money decreases, purchasing power diminishes, leading to a decline in the standard of living.
  3. Distorted Economic Decision-Making: Governments and individuals may make unusual or abnormal decisions in response to inflation, which can lead to economic instability.
  4. Vulnerability for Non-Asset Owners: Individuals who do not own assets may face increased vulnerability in a high-inflation environment.

Gold Nuggets:

Dave Johnston’s gold nugget: we have to be prepared to deal with changing financial circumstances on our journey… from those we can control, to those we can’t. Succeeding, (and thriving) all comes down to your risk mitigation strategies and buffer accounts. We need to understand these things are a possibility, and we need to plan for them.



Ep. 10 – Why your approach and assessment of risk is paramount to your property success!

Ep. 35 – Emotional decision-making: #5 of the top seven critical mistakes

Ep. 46 – Market update: Recovery lessons from recent recessions, the great depression, GFC and the Spanish Flu

Ep. 155 – Plotting Australian property market movements from 1970 to now

Ep. 158 – How interest rate cycles have impacted the property market since 1990

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