Things to watch in 2022: inflation, interest rates, and unemployment

Welcome to 2022, and as we enter our third pandemic year it’s a good time to pause and look ahead to what we can expect from another year of twists and turns.

If we’ve learned nothing else over the past two years, it’s that it takes a brave person to try and look too far into the future, but there are a few things floating on the breeze that are worth paying attention to.

First, let’s talk about the share market. It’s going through a very volatile period and last week went into a “correction”, which means it dropped 10% of its value very quickly.

For investors – whether you invest directly or through your superannuation – this means losses, which is something we haven’t really experienced since the pandemic began.

What caused the correction? Concerns around inflation, interest rates, and unemployment.

Inflation is currently being driven by demand for goods outstripping supply, with global supply chains still struggling to recover from COVID disruptions. As a result, we’re paying more for things like petrol, and while labour costs are increasing, there’s been no real increase in wages to allow people to keep up with the rising cost of living. With inflation currently at 3.5%, that’s putting pressure on the family budget.

This is compounded by the looming spectre of interest rates increasing in the not-too-distant future. The Reserve Bank met yesterday for the first time this year and left the official cash rate on hold at record lows for the moment, and their commentary indicated they wouldn’t look to move until inflation decreases to between 2-3%. The potential increase date we’ve mentioned many times is 2024 but it will be sooner than that if inflation remains high.

However, that doesn’t mean that the banks feel the same way, with some fixed loan rates already creeping upwards, and some indications that variable rates may follow later in the year, that means more pressure on the family budget.

The other factor lolling about is the unemployment rate, which on face value appears to be heading in the right direction. It’s possible unemployment will drop to below 4% this year, which would be welcome news for the Morrison government, with an election fast approaching.

However, what’s lying beneath the numbers is a widespread reduction of hours for many employees, so while the overall unemployment numbers are decreasing, many workers are actually seeing their hours and therefore income decrease as well, which is putting even more pressure on the family budget.

The take-way here is that while things may be looking ok on the surface, we should all continue to brace for another year of volatility and uncertainty. And while many of us managed to cut our spending during the extended lockdowns of 2020 and 2021, it’s now more important than ever to be mindful of discretionary spending with inflation and interest rates heading north, and income heading south.

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