Retirement Affordability Index: inflation falls hardest on those who can least afford it

Let’s start with the expected. July’s Consumer Price Index (CPI) figures showed annual inflation ticked up slightly to 3.8 per cent between April and June this year. Broadly speaking, this wasn’t a surprise and the general consensus is that inflation will return to a downward trend in the coming months.

So what does this mean for retirees?

Well, our retirement tribes – the affluent singles and couples who own their own home and have a private income, the more constrained couples and single homeowners who rely on the Age Pension, and the cash-strapped couples and singles, who rent and receive the Age Pension – all saw inflation rise compared with the previous quarter.

And there’s no surprise that the main drivers this quarter were the usual suspects – housing, food, health, transport and insurance.

But it’s also in these main drivers that we can see the real world impact of inflation on our retirees.

The biggest impact felt hardest by those at the bottom

Most of these drivers are what you’d call essentials. Everybody needs a roof over their heads and food on the table. Cars, trains and buses are essential for some retirees. Ageing increases the amount spent on healthcare. And so on.

And it’s lower income households who tend to spend a larger proportion of their income on essentials. More goes on these essentials and they have less left over for non-essentials. This is why lower income tribes are facing higher rates of inflation. 

Housing in particular is hurting the cash strapped singles and couples tribes. Half of the inflation faced by cash strapped singles is because of housing. It is 40 per cent for cash strapped couples. For affluent singles and couples, it is only 20 per cent. 

Why is this? Well, housing costs continue to be driven by increases in rents, which particularly impact our renting tribes. Rents rose 2 per cent for the quarter and 6.7 per cent for the year. 

There’s some relief though. For those who are eligible for rent assistance, some relief should have arrived on 1 July, when it increased by 10 per cent. Electricity prices are also expected to be lower with further rebates also starting in July.

The bigger picture for retirees

One way to look at how the recent increase in inflation has impacted our different tribes, is to step back and look at the big picture. Prices first started to increase rapidly about three years ago. To see the impact this inflation has had on our six tribes, let’s look at the cumulative price increase over those three years.

Since June 2021, the CPI has risen 16.1 per cent. This is highlighted in red. Three of the tribes have seen a bigger increase in prices than the CPI, and three of the tribes have seen a smaller increase in price.

What is striking is those tribes with lower average incomes have faced higher inflation, while those tribes with higher average income have faced lower inflation. 

Our poorest tribe, cash strapped singles, have seen prices increase by 18.2 per cent. While our wealthiest tribe, affluent couples, has seen prices increase by 15.2 per cent. 

And, again, the main reason for this is that inflation has been largely driven by essentials. The main drivers of inflation over the past three years have been housing, food and transport. You can start to see how it adds up.

One of the most insidious effects of recent inflation is that those hurting the most are the ones who can least afford it.

Drivers of inflation for retirees between April and June 2024

So what else does this quarter’s Retirement Affordability Index tell us? The bad news on essentials: fruit and vegetable prices jumped 6.3 per cent for the quarter, due to shortages of some fruits. 

But there is some good news. Overall food inflation is now lower than overall prices. While the CPI increased 3.8 per cent over the past 12 months, food only rose 3.3 per cent.

After falling last quarter, petrol prices jumped back up this quarter, increasing 1.7 per cent.

But the impact wasn’t just felt by our cash-strapped tribes. The increase in health costs were mainly driven by the annual increase in private health insurance, which occurred in April. This is likely to have a bigger impact on constrained and affluent home owning tribes, who are much more likely to have private health insurance.

Insurance in general continues to have an important inflationary impact, increasing 3.1 per cent for the quarter and 14 per cent for the past 12 months. Premiums across motor vehicles, house and home contents are up, reflecting higher costs from natural disasters. Again, it’s homeowners who feel the impact of this, especially those who are in areas vulnerable to Australia’s climate.

Finally, there were a few bright spots where prices fell. Gas prices fell 1.6 per cent for the quarter. There were also falls in furniture prices and domestic holidays. But those who can afford to refurnish or take off for a break are probably less impacted by inflation in general.

Does this quarter’s Retirement Affordability Index match what you’re seeing in your household budget? Let us know in the comments section below.

Also read: Retirement Affordability Index: rent, healthcare and insurance price rises put additional pressure on less affluent retirees’ budgets

Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.