KEY POINTS
- Supply failed to keep up with demand as the impact of COVID-19 was felt.
- The war in Ukraine also caused inflation to increase.
- Interest rates also sharply rose from record lows of 0.1 per cent.
It was hard to escape the rising cost of household basics in 2022, with fuel, fruit and vegetables all making a sharper dent in our hip pockets.
It was the year when consumers — armed with billions of dollars in savings built up during the pandemic — went on a spending splurge as restrictions were lifted around the world and international borders reopened.
Manufacturers globally struggled to keep up with demand as COVID-19 hindered their operations, as staff took time off sick, blocking supply chains.
As a result, , but there was one unexpected event that really saw inflation take off.
How the war in Ukraine had global repercussions
Together, both nations supply a quarter of the globe's wheat and the conflict sent wheat prices to a record high, adding to surging food prices which hit poor countries hardest.
The conflict also put pressure on oil prices, exacerbated by moves made by the Organization of the Petroleum Exporting Countries (OPEC) to restrict supply.
The national average of petrol and diesel prices has swayed after the fuel excise cut was announced. Source: SBS News
While they’ve both eased from their peaks as global growth stalls, what persists is an energy crisis, particularly in Europe.
How inflation surged across the world in 2022
The combination of rising food, energy and petrol prices contributed to .
In Australia, it surged to the highest since 1990 at an annual rate of 7.3 per cent, and the Reserve Bank has warned that it hasn't peaked yet.
"I think the good news for the year ahead is that inflation will have peaked," said AMP Capital chief economist Shane Oliver.
"We’re going to see more evidence that inflationary pressures will start to abate, we’re already seeing that for example in the US, we’re seeing supply imbalances start to return to normal, we’re seeing lower costs for transport, demand is starting to slow, all of that will lead to a sharp fall in inflation over the next 12 months, at the same time, the still strong jobs market will push wages growth up a little higher."
What will happen with interest rates in 2023?
Higher wages will be good news for borrowers who have had to bear the brunt of the Reserve Bank’s strategy of combating rising consumer prices by lifting official interest rates from an emergency rate of 0.1 per cent in May to 3.1 per cent in December.
That’s the fastest rate of interest rate rises in decades, unwinding 10 years of declines in just eight months.
As banks passed those rates onto their customers, mortgage repayments on variable rates soared and it restricted the amount home buyers could borrow by as much as 27 per cent.
That, in turn, saw property prices pull back from record levels.
Mr Oliver warned there will be future declines ahead.
"There’s probably more pain to come because we’re yet to see the impact of the mortgage rate cliff," he said.
There’s probably more pain to come because we’re yet to see the impact of the mortgage rate cliffShane Oliver
"That will occur when those people who fortunately locked in at 2 per cent or so mortgage rates a year or two ago are now going to find, when they roll over and their term expires, they’ll roll over to five or six per cent and that may, unfortunately, result in a bit of forced selling and more downward pressure on property prices."
