First inflation rises, then the bank hikes interest rates, then house prices fall.
Most of the time houses behave like any other 'product' when there's inflation. They tend to increase by the rate of inflation, as does the amount you'll need to save up as a deposit. Rising inflation means slower house price growth. It can also make it more of a challenge to find a mortgage.
Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.
Entrepreneurs are the gainers in an inflationary economy because prices of their inventories go up, thereby increasing their profits.
Positively for investors, inflation can lead to an increase in property values. For example, rising inflation will result in an increase in the cost of building materials for developments.
Another direct impact of inflation is that it erodes the real value of housing. Real growth in housing values is calculated using quarterly growth in the CoreLogic Home Value Index, minus quarterly inflation. Figure 6 shows the nominal home value index, alongside the real changes in home values over time.
Australia's Inflation Rate in 2023
Next year should mark the beginning of an interest rate decline, the Treasury expects. In a statement from July, Chalmers said it's expected that inflation will track down to 5.5% by mid-2023, and should fall to 3.5% by the end of 2023.
Inflation is likely to have peaked around the end of 2022 and is forecast to return to the target range over coming years. The central forecast is for CPI inflation to decline to 4¾ per cent over 2023 and to around 3 per cent by mid-2025.
The latest quarterly inflation figure (to March 2023) is 7.0%, down from a high of 7.8% in the quarter to December 2022.
After peaking at 6.2% in 2022, we expect inflation to fall to 3.5% for 2023. Over 2024 to 2027, we expect inflation to average just 1.8%—below the Fed's 2% target.
Losers – Savers
Their income and the value of their assets won't have increased at the same rate as price increases. They are made worse off.
Low-income households most stressed by inflation
Prior research suggests that inflation hits low-income households hardest for several reasons. They spend more of their income on necessities such as food, gas and rent—categories with greater-than-average inflation rates—leaving few ways to reduce spending .
Prioritize paying down high-interest debt
As inflation rises, central banks have been raising interest rates to make consumers spend less. These increased rates make it more expensive to borrow money, and make existing debt even more costly. For most consumers, the biggest impact of these rate hikes is on credit cards.
Leveraged loans have higher interest rates and floating interest rates which can help investors profit from inflation. Real estate, gold, and commodities can all hedge against inflation. Collectibles and art, as well as farmland, can be used to profit from inflation.
US Expected Change in Inflation Rates: Next 5 Years is at 3.10%, compared to 3.00% last month and 3.00% last year. This is lower than the long term average of 3.20%.
While cost-of-living pressures will remain, the consumer price index peaked at 7.8% and is on track to be 3.25% by June 2024, or slightly lower than the RBA's and the October budget's prediction of 3.5% by then. The CPI should ease to 2.75% by June 2025 – lower than the RBA's forecast 3%.
Public demand is forecast to remain at a high level
A decline in pandemic-related spending is expected to weigh on public consumption throughout most of 2023. Further out, public consumption is expected to resume expanding, partly due to public spending programs such as the National Disability Insurance Scheme.