It’s time to make inflation your friend!

*It could be stealthily eating your wealth.

Inflation: National Versus Personal 

In the last few weeks, the official annual inflation rate in Australia jumped to its highest point in 13 years – 3.8 percent. Normally this would ring alarm bells that interest rates are about to rise, because part of the Reserve Bank’s charter is to keep inflation between 2 and 3 percent (the idea of this target is to help keep wage growth down to promote full employment).

This time the Reserve Bank will ignore the signals of the rising inflation. It will not consider raising interest rates, which is good if you have a mortgage … not so good if you have money in the bank.

But there are reasons why you should consider the inflation rate … it could be eating away at your wealth.

The inflation rate (or Consumer Price Index) is a measure of a basket of goods by the Australian Bureau of Statistics. Inside that basket is a whole range of things that we buy – food, household goods, clothes, cafes and restaurants, petrol, utilities and communications are all in there. It’s based on information the ABS gets from a survey called the Household Final Consumption Expenditure survey. In short, its an average of what Australians spend.

The important point, however, is that you might not be average. You might spend more on restaurants and eating out than average; you might spend more on domestic travel than other people; or on clothing, or gaming or whatever. The truth is that we all have our own personal consumption … and there we all have our own personal inflation rate.

This is why if you’ve seen the official inflation rate rising at 1.8 percent (it’s hovered around this level for the past few years) you might scoff and say: “but I can see that my prices are rising faster than this.” The truth is: your own prices might be rising faster than the average based on what you’re consuming.

The reason this is important is because the Reserve Bank uses inflation as a yardstick for where interest rates are set. But your employer will typically use inflation to determine how much to increase your pay-packet. The problem is, if your employer offers you a pay-rise of 1-2 percent, but your costs are rising by 5-6 percent; there’s a problem.

Still with the Reserve Bank, there’s another issue. While inflation, as I said at the outset, is rising at the fastest pace in 13 years, you might think that’s a cause for you to get a bigger pay-rise to keep up with those rising prices. Sorry, it might not work that way.

The Reserve Bank has another measure of inflation, called the trimmed mean. This takes out a lot of one-off factors that could cause prices to look high in the short term but are an aberration. A few good examples might be fruit and vegetable prices suddenly jump because there is a flood or cyclone in North Queensland. The Reserve Bank will ignore that with the view that prices will eventually fall when growing gets back to normal.

Another example is last year – as Covid hit – the Government subsidised all child-care. This made the cost of child-care very cheap for families for a short period, but once that program ended, the price of child-care went back to where it was. In other words, statistically it’s a big price rise. The Reserve Bank ignores things like that as well.

But you can’t ignore these price rises because it ultimately determines whether you have enough money to spend on the things you need (or want). This is why you really must have a good look at your credit card and bank statements closely, to understand your own cost of living and to work out where you can spend money better. There are plenty of budgeting apps and programs out there to help you – start with your bank or ASIC’s moneysmart.gov.au site has some great tools as well.

But bottom line, it comes down to you. The harder you work on your money, the harder it works for you.