What Is Inflation & Why Does It Matter?

Let’s face it – when it comes to the economy, things could be a lot better. Like most of the world, the cost of living in Australia is on the rise. But why exactly is this happening? And what can you do to protect yourself from it?

Inflation – a quick and easy summary

Inflation is just a simple way of describing what happens when the price of goods and services begin to rise. This can be anything from groceries, to gas, to the cost of rent.

According to the Reserve Bank of Australia, inflation is usually measured by the Consumer Price Index (CPI)¹. CPI is also used to estimate the price of everyday household expenses such as food, education and insurance.

For this reason, inflation typically describes a rise among many different things at the same time. It can also put a strain on ordinary people that isn’t relieved by a similar decrease in other expenses.

What causes inflation?

To paraphrase the American economist Timothy Taylor, inflation occurs when there’s a shortage of goods and services. More specifically, when too much money is chasing these goods and services².

At its heart, this is what’s driving inflation in 2022. The COVID-19 pandemic has disrupted ‘supply chains’ around the world. These are the networks that businesses use to get goods and services to the people who want them. Now businesses can’t distribute as many goods, but people still need these goods, and more importantly, they are willing to pay increased prices for these goods. This high demand and low supply is a large part of what’s driving up prices.

However, there’s also cause for optimism. As noted by Dean Baker, a senior economist at the Center for Economic and Policy Research, once these disruptions to supply chains end, there’s reason to believe that prices will stop rising. They may even begin to fall³.

So, how is it affecting Australians?

Let’s start with the bad news: inflation in Australia is at a 20-year high. According to the Australian Bureau of Statistics (ABS), CPI rose by 5.1% over a twelve month period to March 2022⁴.

Now, compared to the rest of the world, that’s not too shabby. By comparison, the United States saw a rise of 8.1%⁵. Meanwhile, CPI in the United Kingdom jumped by 7%⁶.

However, that’s probably little comfort to the millions of ordinary Australians who’ve just seen their cost of living go up. The only silver lining here is that inflation doesn’t impact every good or service equally; some rise quite a bit while others stay pretty much the same.

In this case, knowing exactly what you’ll need to budget for may help you deal with inflation a little more easily.

Which costs are on the rise?

Petrol and other fuels

If you drive to work every weekday, then you’ve probably already noticed how expensive petrol has gotten. According to the ABS, automotive fuel rose by 11% from March 2021 to March 2022⁴.

As such, driving is now a much more expensive activity – so you might want to prepare accordingly. Public transport is one possible option to get around cheaply in the meantime, or, if you’ve always wanted to take up cycling, now could prove a thrifty time to do so.

Food and grocery products

The cost of food and non alcoholic beverages has increased by 4.3% from March 2021 to March 2022. This is most noticeable when it comes to fruit and vegetables (5.8%), non alcoholic beverages (5.8%) and meat and seafood (4.8%)⁴.

In light of this, opting to eat healthier might help. Switching out the soft drinks for water is one possibility, while cutting down on meat and adhering to a more sustainable diet is another.

Other costs

While housing, groceries and transport make up about 50% of household expenses, other costs are on the rise too. From March 2021 to March 2022, the cost of education rose 4.7%, furnishings, household equipment and services by 4.9% and health costs – namely pharmaceutical products and hospital services – by 3.5%.

In fact, prices are up across the board with two notable exceptions. The cost of clothing and footwear went down by 1.5% and communication costs, including local calls, mobile services and internet services, also decreased by 0.8%.

Will inflation affect the interest on my home loan?

Sometimes a central bank will raise the ‘cash rate’ in order to fight inflation. This ‘cash rate’ is basically the rate that lenders have to pay each other for overnight loans. Increases in the cash rate usually affect other interest rates as well – and this may include home loans.

It’s also worth noting that the RBA hadn’t raised the cash rate since 2007. As of May 2022, it was raised from an all-time low of 0.10% to 0.35%⁷.

So, what might this mean for the rates on your home loan? According to a report by ABC News, the Big 4 Banks have already begun to implement a raise in variable home loan interest rates as of May 2022. So far it is relatively modest too, with NAB and Westpac only raising these rates by 0.25%⁸.

This will no doubt increase mortgage repayments. For example, ANZ notes that standard variable rate owner-occupiers paying principal and interest will now pay an extra $57 a month on a $450,000 home loan⁸.

In a May 2022 press release, RBA Governor Dr Phillip Lowe also stated that further rises in interest rates will be necessary to fight inflation⁹. If implemented, this may cause people’s home loan repayments to rise as well.

When will inflation end?

A modest amount of inflation is not always a bad thing. So long as the economy is running smoothly and wages are keeping pace with the cost of living, people can generally handle it. Unfortunately, that isn’t what is happening right now.

Inflation – measured by CPI – is currently rising faster than wages are growing. The RBA also predicts that this will continue until December 2023, with inflation reaching its peak at 5.9% in December 2022 and steadily declining afterwards¹⁰.

This means, for the time being, Australians will either have to spend more to enjoy the same standard of living or cut back on expenses to make ends meet. It stinks, but there’s no way around it.

Getting a good deal is more important than ever

Managing a slew of expenses isn’t easy at the best of times, but with a rise in prices it has become even more difficult. Insurance premiums, utility bills and mortgage repayments are just some of the costs that millions of Australians are scrambling to pay.

This is why it might be a good idea to shop around for a product that suits your needs and budget. You may be able to find a cheaper price on electricity or gas with a different provider, a lower premium with a different insurer or a home loan with lower repayments should you choose to refinance.

If you’re interested, iSelect has partnered with Lendi to help you find out more about potentially refinancing your home loan. We also offer a range of comparison services for choosing suitable health, life, and home insurance via a range of providers – so feel free to check with us online and see whether you could save.

¹ https://www.rba.gov.au/education/resources/explainers/inflation-and-its-measurement.html

² Taylor, Timothy. The Instant Economist: Everything You Need to Know About How the Economy Works. New York: Plume, 2012. Print. (Page 141)

³ https://cepr.net/two-routes-to-lower-inflation/  

⁴ Consumer Price Index, Australia, March 2022 | Australian Bureau of Statistics (abs.gov.au) 

⁵ https://www.bls.gov/news.release/cpi.nr0.htm  

⁶ https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/march2022  

⁷ Cash Rate Target | RBA 

⁸ Commonwealth Bank, ANZ, Westpac, NAB to raise variable mortgage rates by 0.25 per cent after RBA rate hike – ABC News 

⁹ Statement by Philip Lowe, Governor: Monetary Policy Decision | Media Releases | RBA 

¹⁰ Economic Outlook | Statement on Monetary Policy – May 2022 | RBA