What exactly is inflation? How is it measured?

Written by Hamish Ferguson

September 7, 2022

Inflation?

Have you ever tried asking your parents or grandparents about the prices of everyday items compared to the years past? I am sure they told you how much cheaper things were back then. Back then, a litre of milk would only cost you 20 cents, and it would be delivered to your door in glass bottles! It’s known to everyone that over the course of history, the purchasing power of a dollar has fluctuated significantly.  

In the field of economics, inflation refers to a general rise in the prices of goods and services across an entire economy. An increase in the overall price level means that one unit of currency can purchase fewer goods and services than before. As a result, inflation is equivalent to a decrease in the purchasing power of money. Simply put, inflation is the rate at which prices rise over a given period of time. 

How Can We Determine the Rate of Inflation?

The Consumer Price Index (also known as the CPI) is a standard indicator of price increases. It monitors the rate of change in the average price that households pay over a given period of time for a predetermined assortment of goods and services. Examining thousands of items purchased from stores, supermarkets, energy providers, and real estate agents is required in order to arrive at a conclusion. The government places these items in a fictitious shopping basket, and each category contributes a different weight to the overall inflation rate. The housing and food industries contribute the most to the inflation rate, while the clothing and telecommunications industries contribute the least. The Australian Bureau of Statistics calculates once every three months to determine how much the overall costs of the basket have increased. 

What Are the Factors Contributing to the Rise in Inflation?

Whenever there is a rise in inflation, we want to know what exactly plays behind the price hikes seen in many of the things we use regularly. Many pressures are still being felt as a result of the global pandemic, such as an increase in the cost of coffee beans due to frosts and droughts in other countries. Russia’s war in Ukraine has severely disrupted global oil supply chains, and this, combined with Australia’s dollar exchange rate, has significantly impacted the rise in inflation. 

How Does RBA Control Inflation?

By increasing interest rates, the Reserve Bank of Australia is able to control inflation and price increases in the economy. An estimated 37% of households in Australia are currently carrying a mortgage, despite rising interest rates. Because of this, the households in question will have to pay a higher interest rate on their loans, meaning they will have less money to spend on other things. It is important to note that a decrease in the rate of consumer demand may also bring about a decrease in the rate of inflation. 

What Does the Forecast on Inflation Look Like?

Experts and even non-experts have predicted that inflation will continuously rise in the coming years. The Governor of the RBA, Philip Lowe, forecasts that inflation will reach its highest point of 7% in the December 2022 quarter (it was 6.1% in the July 2022 quarter). The board of directors of the RBA has committed to making steady progress toward bringing inflation rates back within the target range of 2% to 3%. At a recent event hosted by the Australian Business Economists in Sydney, Treasury Secretary Steven Kennedy predicted that inflation will likely increase to levels significantly higher than 6% and remain there for the remainder of the year. The economic forecasters employed by the nation’s four largest banks are unanimous in their belief that inflation will exceed 6%, with slightly varying estimates. 

 

 

 

 

 

 

 

 

 

 

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Help My Wealth is here to help.

This indicates that members of the general public ought to be conscientious about household budgeting and cash flow, in addition to making provisions for further increases in the cost of living, including the cost of mortgage repayments. In light of the fact that price increases are likely to persist for some time to come, it is even more imperative that you give some thought to your specific circumstances and seek the guidance of an expert.

Help My Wealth has the combined knowledge and experience of over 20 years of advising people on how best to navigate fluctuating inflation rates. 

Want to know more about this topic or how to get started? Then contact us here

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0240141949

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info@helpmywealth.com.au

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Suites 1 & 2 Lake Macquarie Fair, 46 Wilsons Rd, Mount Hutton NSW 2290, Australia

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Phone

0240141949

Email

info@helpmywealth.com.au

Address

Suites 1 & 2 Lake Macquarie Fair, 46 Wilsons Rd, Mount Hutton NSW 2290, Australia

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