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What is inflation and what are its effects?

Financial Wellbeing Coach

2024-05-14 00:00

Estimated reading time
6 min

Learn all about

  • What inflation is and how it affects just about everything
  • Protecting your financial wellbeing when inflation rises
  • How can you be prepared for changes to inflation

Inflation, inflation, inflation. If you live in Australia, you’ve probably heard the ‘I’ word a lot and you’ve most likely felt it, with prices going up at your local supermarket, or a rise in your utility bills.

While many people get what inflation means at surface level, dealing with it can be easier if you know exactly how it works and the flow-on effect it can have on your finances.

After all, it’s how you’ll measure how much of a pay rise you might need to keep the same lifestyle, it helps estimate how much money to put aside for the future, and is even important for your daily budgeting.

So are you ready? Let’s go.

What is inflation, exactly?

According to ANZ senior economist Adelaide Timbrell, inflation is “a change in the prices of commonly purchased goods and services over time.” Or in other words, it’s the increase in your living expenses over a certain period (typically a year)1.This includes everything from groceries and clothing to housing and transport.

How is inflation measured in Australia?

In Australia, the rate of inflation is based on something called the Consumer Price Index (CPI) which is essentially an index of the prices of everyday items across the country. This is compiled quarterly by the Australian Bureau of Statistics (ABS), and any change in prices over time contribute to the end product, which is the inflation rate.

Some prices go down over time and others go up quickly, but on average prices generally go up. The more common an item is, or the more important it is for a household budget, the more a change in its price affects the inflation rate. For example, if inflation is 5%, it means that on average, all the prices in the CPI went up by 5%, but it could mean some prices went up by 10% and others went down by 2%.

Why does inflation matter?

Ms Timbrell noted that "inflation is important to our day-to-day lives because if our incomes stay the same, but prices go up, we can buy less over time. This is especially noticeable when inflation is moving at a faster rate, or when inflation is driven by rising prices of essential goods and services, like electricity, groceries or housing costs."

What is the CPI and inflation rate in Australia?

If you want to stay on top of the CPI and inflation rate in Australia, your best bet is checking the ABS website every couple of months. Each quarter, the ABS will provide an update on what categories had the most highest price rises, which can be anything from home purchases to groceries.

Inflation has been at its highest rate in about 30 years and is due to a range of persistent local and international factors.

One key factor both at home and globally is the lingering effect of government spending and low interest rates after the COVID-19 pandemic, which put more money in people’s pockets and created a “bottleneck” of spending. Ms Timbrell explained, “when more people want to buy the same thing at the same time, companies don’t have to compete as much on price to sell their items”.

Other global factors like the Russia-Ukraine and Middle East conflict, have made key commodities and certain products more expensive, which feeds into prices of common goods and services. For example, if petrol is more expensive, then it costs more to get food from the farm to the supermarket.

How does the inflation rate affect the interest rate?

When inflation is high, we know that the price of goods and services will go up. To try and make inflation go down, the Reserve Bank of Australia (RBA) might increase the interest rate. This, in turn, can affect your ability to borrow money from a lender, like a bank, to spend on a home, car or other goods and services.

What can you do to protect your financial wellbeing in the face of inflation?

There’s lots of things you can do – big and small – to help improve your financial wellbeing, and build resilience in the face of all kinds of change, inflation included. At the end of the day, it’s about ensuring you, and your loved ones, feel secure for today, tomorrow and beyond. 

Here is a quick list of simple ways you can protect your financial wellbeing when inflation is mighty high:

  • Plan your budget and stick to it – this can help you avoid unnecessary overspending
  • Reduce everyday expenses where you can – for instance, swap from branded pasta to home brand or cut down on your subscriptions
  • Save for a rainy day – try and keep up with your savings goals, by adding what you can to your savings fund. You never know when you might need it!

Brain hack

Ever heard one piece of information then used it as a filter for, well, everything? Anchoring bias is a way of thinking where we become influenced by the first piece of information that we hear. In the context of inflation, if you heard that inflation might still be increasing then you might manage your financial expectations around that fact and overestimate. On the flip side, if you heard that inflation is going to fall, you might underestimate your budget and financial expectations. To avoid this way of thinking, get all the facts and figures before making a decision or doing something that can affect your finances – and be prepared to change tack as required.

3 quick facts about inflation

1. Yes, exchange rates do affect inflation

    When the Australian dollar is weaker on a global scale, this can push inflation up. This is because we have to pay more in Australian dollars to buy goods and materials from overseas, even if they are the same price in the seller’s country’s currency. So the price Australian products need to be sold for here goes up, to recover costs.

2. Immigration doesn’t necessarily affect inflation

    A common misconception is that immigration helps inflation go down because more people living in Australia means more people to work jobs, and less competition for workers. But in reality, people who migrate to Australia have houses, cars and go out for dinner just like any other resident – which increases the demand for workers. Overall, the impacts mostly offset each other.

3. Wage growth doesn’t equal inflation

    When Australia’s average wages go up, people sometimes think this will just be offset by inflation. For example, if it’s more expensive to pay people in a business, wouldn’t that just make the products more expensive for the customers? But sometimes what we’re seeing is actually just more people switching to better jobs. If you’re getting paid more but doing more valuable work, that bigger paycheck is not going to be passed on. And even if you’re doing the same job for more money, it still would not be completely offset by a rise in prices, since the cost of workers is just one of many costs for a business.

How can you prepare for inflation changes?

Ms Timbrell said inflation isn’t just about making life more expensive. “It also creates uncertainty, because people can’t plan ahead as much if they don’t know how expensive it will be to pay for the essentials in the future”.

Inflation might come down eventually, but it does not mean life will be ‘cheaper‘, but rather that everyday goods will be getting more expensive, but much more slowly. Until then, you can build resilience to prepare for any changes and educate yourself on all things money management.

What is inflation and what are its effects?
Financial Wellbeing Coach

Be financially ready for anything – including inflation

One of the things you can do to be financially ready for anything (even inflation!) is to make a budget and keep track of your spending. Why? Well, this can help you understand how you’re spending your hard-earned money so you can make better financial decisions. And if you want a hand making a top-notch budget, then use our budget planning tool – pop in a few numbers and let us do the rest.

Make a budget now



The information set out above is general in nature and has been prepared without taking into account your objectives, financial situation or needs. Before acting on the information, you should consider whether the information is appropriate for you having regard to your objectives, financial situation and needs. By providing this information ANZ does not intend to provide any financial advice or other advice or recommendations. You should seek independent financial, legal, tax and other relevant advice having regard to your particular circumstances.