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Inflation is “public enemy number one” according to our treasurer, but many Australians don’t quite grasp what it is and how it impacts our every day lives. With this in mind we thought we’d put together a brief overview of what “it” is and how it affects our financial situations.
In economics, inflation is defined as an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.
Let’s make it simple: If you bought an item today for $100and the same item cost $105 on the same day next year, inflation for the year on that one item would be 5%.
Inflation is a major economic indicator of performance, driving economic policy and decisions made by the Reserve Bank of Australia(RBA).
It’s measured in Australia mostly by the Consumer PriceIncrease (CPI), which is calculated here but the Australian Bureau ofStatistics (ABS). Published quarterly, the CPI measures the percentage change(just like in our example above) of a variety of common goods and services.
To do the calcs, they consider how we spend our income, weighing up categories of goods and services against each other as part of a“CPI basket” of sorts. Importantly, grocery and general housing costs take a greater portion of an inflation calculation because they generally make up the largest portion of our pay checks.
Here are the official CPI categories:
It’s important to note that high inflation is often a result of strong economic growth even though, consumers can have reduced purchasing power, with the value of their earnings lowered. This kind of outcome seems to level the playing field, which is why an inflation target is important in managing price stability and the welfare of Aussies.
Overall, the RBA specifically work to keep inflation at bay by setting targets and making changes to the cash rate to impact it. The current target inflation rate is between 2% and 3% while the actual rate for the September quarter of 2022 is over 7%...
As discussed, the impact of this is increased cost of living, meaning Australians are stretching incomes to meet higher costs, but there’s more to consider too…
With higher costs, staff may be looking for wage increases which impacts business heavily. Whether that’s through actually paying more to employees or perhaps losing them to competitors who will, creating instability and potential disruption.
It could even go so far as resulting in job losses for businesses who just can’t afford to keep the staff they have in place, which then has knock-on effects for our unemployment rate and so on.
It may get a little worse first, but it’s forecast to improve next year according to RBA Governer, Philip Lowe:
“a further increase in inflation is expected, with inflation now forecast to peak at around 8% later this year”.
“Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand,”
It’ll be great to see some relief for Australians next year, but the Attune team is here to help you navigate whatever may come. For tailored, strategic advice that can strengthen your financial situation, give us a call on 1300 866 113 or send us an email.
