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The cost of living in Australia is rising – quickly – and it's expected to keep rising throughout 2022. Why is this happening now? 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.
You've probably heard the term 'cost of living' a lot lately, but what does it actually mean? In a nutshell, it's a summary of how much it costs to live in a particular place (in our case, Australia).
At the moment, those costs are increasing. Your 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; all of these everyday costs 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.
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 for 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.
CPI is calculated by comparing the total cost of the basket last month to this month, and then it's expressed as a percentage.
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 required to maintain a given standard of living.
The inflation rate for March 2022 was 5.1%, meaning the overall cost of living has risen by this much over the past year. For context, the RBA's ideal inflation rate sits at around the 2% mark, so this is much higher than the ideal. This rate of inflation was the highest recorded since 2009.
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 5.1%, 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, it means our money is essentially getting less valuable.
Unless your income goes up at 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 5.1% means, on average, you need $105.10 today to buy what $100 bought you 12 months ago.
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 has been, since the pandemic first began in early 2020), it stimulates spending and household investment. This spending is what drives inflation up.
When the cash rate gets higher (which is happening now, with the RBA lifting rates in May), 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.
Periods of high inflation are a normal part of the economic cycle, and usually it's nothing to worry about. But high inflation can impact some people more significantly than others:
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