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Cost of living in 2023
We explain and simplify the latest news about inflation, interest rates, the economy and everyday costs, with tips to help you save money.
The cost of living in Australia is rising – quickly – and it's expected to keep rising throughout 2023. We had 10 consecutive cash rate hikes from a low of 0.1% up to 3.60% in March 2023. Since then, the RBA has increased or held the cash rate and it now stands at 4.35%.
The latest quarterly inflation figure (to September 2023) is 5.4%, down from a high of 7.8% in the quarter to December 2022.
Why? Because the cost of virtually everything, from breakfast cereal and fruit to petrol and even rent, is going through the roof. We explain why, and how it impacts you.
At the moment, those costs are increasing. Day-to-day necessities like fruit and vegetables at the supermarket, your medications from the chemist, the petrol you put in your car, even your energy and gas bills, and your home loan or rent, are increasing due to something called inflation.
The cost of living looks at the cost of essentials, not luxuries. It's used to measure how expensive it is to live in one place compared to another.
How is the cost of living measured?
The main way it's measured is with the Consumer Price Index (CPI).
The CPI measures the costs of 11 categories of necessary goods and services. The Australian Bureau of Statistics (ABS) looks at the prices of thousands of individual items and measures their price movements month to month.
From here it'll pull out a "basket" of everyday goods and measure the cost of these items.
Monthly inflation figures
In the past, the ABS has released CPI data on a quarterly basis. As of November 2022 it started releasing monthly year-on-year figures to get a better understanding of where inflation sits.
The first monthly CPI figure was for the month of October 2022 and showed that inflation had fallen back slightly compared to the quarterly figure. However, the quarterly figure remains the principal measure of household inflation.
Inflation figure for October 2023: 4.9%
The most significant rises were housing, transport and food & non-alcoholic beverages.
Data for November 2023 is scheduled to be released on 10/01/2024
What's in the CPI basket?
CPI is calculated by comparing the total cost of the basket last month to this month, and then it's expressed as a percentage.
When the cost of the overall basket goes up, the cost of living is rising and monthly CPI has officially increased, e.g. CPI is up 0.7%.
When the cost of the overall basket goes down, the cost of living is decreasing and monthly CPI has officially fallen, e.g. CPI is down 0.4%.
The change in the cost of things over time is how we determine inflation or deflation.
While CPI is used to measure changes in prices, inflation measures the change in spending by households.
Inflation over the 12 months to the September 2023 quarter was 5.4% – so the overall cost of living has risen by this much over the past year.
The inflation rate for September 2023 was 5.6%.
The RBA's ideal inflation rate is around 2-3%.
Why is inflation important?
Inflation measures our buying power – in other words, how much your money is actually worth.
If the cost of a basket of items has jumped 7.3%, but your income has stayed the same, your buying power has gone down as you can't buy as much with your money as you could last year.
With inflation rising at a fast pace, our money is essentially getting less valuable.
Unless your income goes up by at least the same rate, rising inflation will lead to financial pressure for many people who can't keep up with the increased costs of groceries, fuel and housing.
Inflation of 6.3% means, on average, you need $106.30 today to buy what $100 bought you 12 months ago.
How does inflation change?
Without getting too deep into economics, the primary tool the Reserve Bank of Australia (RBA) uses to control inflation is the cash rate.
When the cash rate is low (like it was in early 2020 through 2021), it stimulates spending and household investment. This spending is what drives inflation up.
When the cash rate gets higher, it generally translates to less household spending, which helps drive inflation down.
This is because when the RBA increases the cash rate, banks and lenders pay more for the funds they lend out, and charge more for a home loan. Overall, this makes borrowing money more expensive.
Why a rising cash rate lowers inflation
Why are people worried about inflation?
High inflation means it is more expensive to pay for things. It puts more pressure on household budgets and can lead to financial stress. Some groups of people significantly affected by inflation include:
Lower income earners. People on low incomes or who are living payday to payday are the first to feel the impact of rising inflation. As the price of goods and services goes up, your money doesn't go as far, which can make it really hard to make ends meet.
Those on fixed incomes. People on fixed incomes, like retirees, are also affected more by rising inflation. When you're working, rising inflation puts pressure on wages to keep up. However, if you're not earning a wage, you don't benefit from this upward movement.
Mortgage holders.People who have a home loan are affected by both inflation itself, and by the raising of the cash rate used to stifle it. When the cash rate increases, banks raise home loan rates, and if your rate is variable, it means your mortgage gets more expensive each month.
Independent financial expert Nicole Pederson-McKinnon says, "The chances are the biggest pressure on your purse strings is coming from rising rates if you're a home owner or rising rents if you're not. The easiest ways to contain the pain are to get 'moving or mowing', respectively; move to a cheaper lender or make like many Aussies and barter your assistance and expertise for a discount from your landlord."
Inflation affects everyone to some extent, so it's a good idea to ensure your budget has some wiggle room.
If you're facing financial hardship, you can call the National Debt Helpline on 1800 007 007 for free and independent advice.
And if cost of living pressures are causing you distress, you're not alone. These free resources can help:
With inflation rising, it means your cash in the bank is worth less than it was before. However, there is some good news for your savings.
With the RBA increasing the cash rate, banks are increasing home loan rates too. This is bad news for home owners as it means they'll be paying more interest. However, banks are also increasing their savings rates. This is good news for savers as you'll be earning more interest on your cash.
Just over 12 months ago you'd be lucky to find a savings account offering much more than 1.5% p.a. interest. Now, as of December 2023, there are several high interest savings accounts paying over 5% p.a. interest.
How inflation affects your income
When we have rising inflation it means your money is effectively going backwards, unless your income is also increasing at the same rate. Unfortunately, the RBA is strongly advocating that employers don't give pay rises in line with inflation.
If everyone got a pay rise in line with inflation, the RBA fears it'd only push inflation even higher. This process is called a wage-price spiral, and it's the reason why you might not get much of a raise this year.
It's easier said than done, but there are heaps of small, simple ways to decrease your spending and the savings really add up. ⭐ Top tip: Grocery shop at night
Investing your money is a great way to grow your wealth while you sleep – and you don't need a lot to get started. ⭐ Top tip: Start with micro-investing
With inflation at 6.0%, if you haven't increased your income, you're going backwards – here's how to negotiate. ⭐ Top tip: Come prepared with this data
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Alanna Glenn is the lead publisher for money at Finder. She has an Honours Bachelor of Commerce from McMaster University in Ontario, Canada and likes to get into the nitty gritty of all things financial and legal.
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