In September, the Consumer Price Index (CPI) in Australia increased 5.4% year-over-year. The CPI records the cost of goods and services over time and is often used as a marker for inflation. For reference, the Reserve Bank of Australia (RBA) sets an annual inflation target of 2% – 3%.
However, as with all statistics, there’s often more to the number than meets the eye. In order to fully understand how inflation impacts you, it’s important to learn how it’s calculated.
What is inflation?
Put simply, inflation is the rate at which the price of goods and services increases over time. In turn, it’s come to represent the cost of living in any given country.
What does inflation mean in economic terms?
When the cost of goods and services rises quickly (or faster than expected), people may struggle to afford basic supplies, such as food or fuel. And, without a thriving marketplace, businesses can struggle to turn a profit and stay afloat.
In response, workers may demand higher wages to afford basic goods and services. But higher wages also means higher costs for the businesses, who then raise prices to cover the cost of increased wages.
Not all inflation is considered bad, per se. The RBA aims for an annual CPI increase of 2% – 3%. This level ensures a moderate increase in prices that is sustainable for consumers.
Can inflation lead to a recession?
As discussed above, an unexpected or severe rise in inflation can lead to people spending less and businesses struggling to stay afloat. This, in turn, can lead to layoffs and an increase in unemployment. Without a job, people are even less likely to be able to afford goods and services, and the downturn accelerates. This consistent downturn is what’s often referred to as a recession.
A ‘technical recession’ is when the gross domestic product records two consecutive quarters of negative growth. The last time this happened in Australia was in the early 1990s.
When a recession continues for a prolonged period of time, it’s often referred to as a depression. The most famous of which started in 1929 and led to global large-scale unemployment and general economic disaster.
How is inflation measured in Australia?
In Australia, inflation is measured using the CPI, which is compiled by the Australian Bureau of Statistics (ABS).
The CPI measures what the ABS calls a “basket of goods and services” that includes everything from food, housing, electricity, petrol, rental accommodation, education and healthcare costs. It then calculates the change in these costs over a quarterly period and arrives at an aggregate figure. This percentage represents the overall rise in costs, and subsequently, inflation.
The basket’s weighting is typically adjusted every December according to what Australians are spending their money on at the time.
» MORE: What is mortgage stress?
What is the current inflation rate in Australia?
In September, Australia’s annual CPI was 5.4%, which was lower than June’s annual increase of 6%. However, this number is still well above the 2%-3% annual range that the RBA aims for.
What is causing high inflation in Australia?
There are several factors causing high inflation at the moment, chief among them being high demand for commodities such as petrol and electricity, and grocery staples, as well as ongoing supply-chain issues that started during the pandemic.
It also should be noted that the world economy has become globalised to the point where many economies experience inflation simultaneously. A country such as Australia may have unique characteristics that push inflation a little bit higher or lower for a particular reason, but its inflation rate will generally be in step with its major trading partners and the global economy as a whole.
Events such as natural disasters can also put a strain on economies due to the difficulty in sourcing staples, such as fruit and vegetables. Geo-political events also can have a big impact on inflation. Russia’s ongoing war with Ukraine has placed considerable strain on global energy and grain supplies, leading to increasing uncertainty, which has pushed the price of these commodities to near-record highs throughout the world.
Australia’s historical inflation rates
Over the past 20 years, the annual CPI in Australia has ranged from +7.4% to -0.4%, based on data from 1993 to 2023 for Q3. The below table shows how the CPI, both general and trimmed, has fluctuated over time.
The ABS has been collecting CPI data since 1948. However, trimmed data has only been recorded since 1987.
The cost of goods and services fluctuated more dramatically in early years compared to recent data, with a steep increase in 2020, driven by the pandemic. The below graph shows annual CPI changes from 1949 to 2023 for Q3.
How does the RBA counter high inflation?
The principal tool that the RBA has at its disposal in the fight against inflation is altering the interest rate.
By raising interest rates, which the RBA has been doing since 2020, consumers are less likely to spend or borrow money. This slows the demand for goods and services, which causes businesses to lower prices in order to stay competitive.
Savings accounts may also see increases in rates, which promotes saving and slows spending even more.