During 2023, Australia's annual inflation rate, measured by the Consumer Price Index (CPI), escalated to 7.8%, far exceeding the Reserve Bank of Australia's (RBA) target band of 2% to 3%. A critical driver of this spike was the sharp rise in global energy prices and rental housing costs, which heavily increased utility bills and housing expenses.
The Australian Bureau of Statistics (ABS) noted that this surge severely strained lower-income households. Essential goods and services consume a larger share of their disposable income, forcing many to cut back on non-essential purchases. To sustain basic living standards, a growing number of families have relied on "buy now, pay later" services and short-term personal loans.
Real wages contracted because nominal wage growth (average hourly earnings rising by 3.3%) was less than half the headline CPI inflation rate. Consequently, the Reserve Bank of Australia responded to these persistent inflationary pressures by raising its official cash rate by 25 basis points in consecutive months to dampen aggregate demand.
With reference to Extract A, explain two likely economic effects of the higher rate of Australian inflation.
