In the Zone - June Quarter 2017

Economic Update - worries over worsening family finances

Australian wages are rising at their slowest pace on record, subduing spending at a point when household debt has climbed to an all-time peak. Combine this with an inflation rate which is at a 2 ½ year high has meant household consumers are under intense pressure from rising living costs.

Wage growth

Wage growth remained at record lows in the March 2017 quarter, with workers receiving a pay rise of just 0.5 per cent. This rise in wages hasn't even been enough to cover the rise in prices, let alone allowing households to consume more. Annual wage growth is just 1.9 per cent, the lowest on Bureau of Statistics figures that go back to the late 1990s, and probably the slowest rate of pay rises since the last recession.


Consumer prices in Australia rose 2.1 percent through the year to the March quarter of 2017, up from 1.5 percent in the fourth quarter 2016. It was the highest inflation rate since the September quarter 2014, driven by a surge in cost of transport and an increase in cost of food and non-alcoholic beverages and housing. Now while this is the reported level of inflation, the actual rate is at a much higher level than the Consumer Price Index would have us believe – this is what is known as ‘stealth’ inflation. Stealth inflation is not reported, however, everyone has an example of it. It occurs when a product diminishes in quality or size, and prices remain the same. Think about some recent examples:

[if !supportLists]· [endif]In 2015, Cadbury shaved 20 per cent off the humble Freddo — but the recommended retail price did not drop. Freddo is now 12g, trimmed from 15g. In 2013, main variety Freddos were 20g.

[if !supportLists]· [endif]In a phenomenon known as ‘de-sheeting’ the $63 billion US multinational Kimberly-Clark last year admitted to reducing the length of Cottonelle toilet paper by 1cm to 10cm. The price remained the same. The length reduction follows a 10 per cent decrease in weight in 2014. Both moves made the rolls smaller.

Unfortunately there is no official measure of this form of inflation, only anecdotal evidence, conversations in the supermarket queue, at the school gates, with furniture salesman etc. Think back to when you first noticed an item of clothing falling apart or not washing properly and wondering why these things didn’t last anymore.

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” John Maynard Keynes.

“Inflation is taxation without legislation” Milton Friedman

So when you think of the official inflation rate, also remember ‘stealth’ inflation and how it affects your hip pocket.

Household Debt

This is a familiar topic and one that has attracted a lot of attention recently. It is understandable why this is so - the cost of housing and how we finance it matters to us all. We all need somewhere to live and for many people, their home is their largest single asset. Household debts have risen to a record level relative to incomes, adding to the Reserve Bank’s concern about the vulnerability of the Australian economy to the housing market.

This means that the balance sheets of Australian households with a mortgage are dangerously exposed to any fall in house prices. It isn't just that household debt relative to disposable incomes has reached a record high of 189 per cent, it's that households' ability to service that debt is potentially a ticking time bomb.

What can you do to ease the pressure?

How do you avoid getting into that awful predicament when you realise you can't pay all your bills? Initially, Investment Zone recommends drawing up a household budget. It's estimated that less than half of households actually draw up a budget. It doesn't matter if you're on your own or if you're part of a large household. Work out what money's coming in, and how much is going out, and try to get on top of your finances. We can certainly help you with this. Recently, we have adopted a wealth management programme, called My Prosperity, and offered this to clients. It’s a unique app which allows you to have your entire financial world in one place, 24/7 accessible on any device, behind one login. This means credit cards, bank accounts, home loans, investment loans, property, superannuation, investments, and cars - anywhere, anytime, on any device. This means you can take control of your cash flow with automatic categorisation of your income and expenses and instant budgets.

Take a look at

In a time when we are all overwhelmed with new apps and tools and programmes, we are really excited by my prosperity, we think it's an industry game changer.

And on the debt front? Just because the bank is willing to give you money, doesn't mean it's a good idea!