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What sparks a cost-of-living crisis?

A full tank of petrol suddenly leaves you $100 out of pocket and your weekly grocery shop is $100 more than it was a year ago.

The cost-of-living crisis seems like it’s well and truly here to stay.

By now, after living it for several years now, we all understand what a cost-of-living crisis is: in a nutshell, the cost of goods and services are increasing while wages are remaining stagnant.

But why does a cost-of-living crisis occur in the first place?

Dr. Omar Bashar from Deakin University’s Faculty of Business and Law points to two pivotal factors driving this current cost-of-living crisis.

‘Two major causes stand out. Firstly, our excessive spending post-lockdown, and secondly, supply disruptions arising from the conflict in Ukraine,’ he says.

Rise in Spending Post-Lockdown

The decrease in spending during lockdown significantly contributed to the crisis, notes Dr. Bashar.

‘Throughout the Covid-19 period, enforced limitations curbed our spending, resulting in many accumulating surplus savings. When the pandemic ended, people resumed their lives with newfound freedom, utilizing these savings to boost their expenditure.’

Simultaneously, the conflict between Ukraine and Russia erupted, leading to a surge in energy prices.

Groceries, rent, fuel, and energy prices demonstrate the most notable disparities, but prices are soaring across most goods and services.

Despite these challenges, Dr. Bashar is optimistic. “Given constant external factors, the situation is likely to improve. In my assessment, the Reserve Bank of Australia (RBA) has taken sufficient measures to manage demand-side factors.”

Wages are often slow to alter

Dr. Bashar highlights the sluggishness in wage adjustments by businesses, often viewed as a means to maximize short-term profits.

‘Wage changes typically lag behind price shifts. Businesses are hesitant to increase costs through wage hikes unless they foresee sustained inflation. Some perceive this as an opportunity for short-term profit,’ he explains.

Embracing Short-Term Hardships for Long-Term Gain

The prevailing suggestion, as per Dr. Bashar, is patience. Additional cash injections could exacerbate the problem.

‘At present, exercising restraint and waiting a few more months might be our best recourse. Governmental cash distribution could potentially worsen inflation. Embracing short-term difficulties is crucial to curb inflation,’ he emphasizes.

While acknowledging inflation as a concern, Dr. Bashar advises caution rather than excessive worry. ‘Inflation poses a challenge, but it’s manageable. Young individuals need to be mindful of their spending and borrowing habits. Being cautious is prudent, but excessive concern isn’t warranted,’ he reassures.

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Dr Omar Bashar
Dr Omar Bashar

Senior Lecturer,

Faculty of Business and Law,

Deakin University

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