A guide to managing your finances in 2023

01

Record inflation is expected to ease 

One of the big economic stories of 2023 is again set to be inflation. Commonly associated with the ‘cost of living’, its pace of increase in the last 12 months has fast made it a headline issue for households. 

Generally speaking, inflation refers to the increase in the prices of goods and services that households buy. The Consumer Price Index, or CPI, is one of the better-known measures of inflation, tracking changes to prices in important categories for households, such as fuel and food. Last year, Australians experienced the sharpest annual rise in the CPI since the 1990s.¹

“The main impact from inflation is on household balance sheets,” says Ric Deverell, Chief Economist at Macquarie Group. “Every time you go to the shop you have to pay more for the things that you’re buying.”

While it’s been a tough period for household budgets, inflationary pressures do appear and settle throughout history, often coupled with economic disruption. The chart below shows how this current spike compares to previous decades. 

After rising sharply over the last two years, there are also some indications that inflation may finally begin to fall in 2023, with signs it has peaked in advanced economies overseas. 

“I do think it will decrease substantially in headline terms over the first half of next year but in underlying terms, the labour market is very tight, wage growth is picking up and I think it’s going to take some time,” says Deverell. 

Find out more: Why inflation is one to watch in 2023

02

Could interest rate relief be on the cards? 

Between May and December last year, the Reserve Bank of Australia (RBA) raised the official cash rate target eight consecutive times, lifting it from its historic low of 0.10% to 3.10%.² 

The RBA explained these moves were largely made in a bid to return inflation to its target of 2-3%, with rate hikes used to reduce consumer demand (among other things).³

While the pace of rate rises in 2022 has been fast, the cash rate remains historically low compared to previous decades.

2023 meanwhile is likely to be a year of transition. As inflation begins to fall and prevailing economic conditions change, the RBA may soon be thinking about when to stop raising the cash rate.

Deverell says the “most likely” scenario is that the RBA will hike the cash rate higher before holding it there. How long for will depend on how Australia’s economy handles slowing global growth.

“Over 2022, the RBA increased the cash rate at the fastest pace in many decades. We think they’re getting near to the end of that tightening cycle, but much will now depend on what happens in the economy. If the economy remains strong, they will have to hike more, but if the economy slows as we expect they may be nearly done,” says Deverell. 

“I do think that as inflation comes back under control central banks will be thinking about easing by the end of the year and that should set us up for a nice long [economic] expansion starting in 2024.” 

03

Why 2023 could be the year property prices stabilise 

Higher interest rates in 2022 have limited the borrowing capacity of Australians, contributing to a drop in price growth across most major capital cities.⁴

“As the RBA has rapidly increased interest rates, house prices have fallen rapidly. In fact, in Sydney we have now had the fastest fall we’ve seen in the last 40 years,” says Deverell. 

National home values fell 5.3% in 2022 according to CoreLogic.⁵ Sydney property prices led the losses among capital cities, falling 12.1% on average, followed by Melbourne (8.9%) and Hobart (6.1%). 

Despite those falls, average capital city prices remain 11.7% higher than pre-pandemic levels while regional values are still up 32.2%.⁶ For context, over the last 10 years national dwelling prices are up 60.3%. 

Looking ahead, Deverell says property prices in 2023 will be influenced by the RBA’s next course of action.

“The RBA is in play, they’re going to hike a little bit more, interest rates are high and that’s going to have a really big impact on the property market,” says Deverell.

“I think there’s going to be more pain but by the end of the year, my guess is that things will be stabilising and then hopefully we can resume another cycle in 2024.” 

Find out more: 4 things investors should consider as the economy slows