With headlines focused on inflation being at its highest in decades, and gas prices piling on the budget pressure, it’s safe to say this has played a more noticeable role in consumers’ lives recently. So, why exactly is inflation a topic of discussion? We’ve broken down the Reserve Bank of Australia’s (RBA) latest analysis* to answer this very question for you.
What is inflation?
To start with the basics, the RBA defines inflation as an increase in the level of prices of the goods and services that households buy.
For example, if a schoolbook cost $20 in 2021, but went up to $20.50 in 2022, you’ve been hit by a 2.5% rise in inflation over that year.
The Consumer Price Index (CPI), is an indicator of inflation that’s calculated quarterly to help us track the rate of change in the price of the things we buy.
What is the ideal rate of inflation for Australia?
The target for inflation set by the RBA is 2-3% year-on-year. However, it’s currently sitting at 6.1%, which – while lower than many other countries – is still the highest it’s been since 1991. As such, the current challenge is to slow down the rate at which prices of things like groceries, transport and commodities rise while balancing economic growth and unemployment rates. There are some global factors that could hinder this.
Why is inflation currently so high?
There are three main factors contributing to inflation across the globe.
- Interruptions to global supply chains
During the pandemic, many business operations were severely disrupted as the movement of people and goods (anything from timber and steal to new cars and livestock) slowed or stopped. This caused an increase in the costs of supply and production for many businesses globally. Combine this with the fact that people spent more on products during the pandemic (and less on services), and you get increased prices.
- Russia’s invasion of Ukraine
This has led to major disruptions in the global markets for energy and food, leading to higher prices. Higher energy prices are now starting to increase the costs of transport and production.
- People are spending more than expected
Household spending recovered faster than expected after the pandemic. A lot of this is thanks to the success of Government vaccine rollouts, campaigns and policies – confidence is high as the health situation has improved. This has given people a sense of freedom to spend again. Plus, we have record low unemployment, so there are even more people willing and able to spend. More people, spending more, all contribute to inflation.
What will help reduce inflation going forward?
There’s not one factor, but on a global front, positively, there’s an expectation that COVID-related disruptions will ease in the near future – helping to alleviate some supply concerns, which are causing prices to rise. Plus, the prices of many commodities are declining after sharp increases were spurred by Russia’s invasion of Ukraine. If this continues, some global inflation pressures will be eased.
On the home front, Australia has bounced back in many aspects to pre-pandemic levels – especially when it comes to employment and spending. With this, the RBA has started to increase the cash rate to more ‘normal’ levels, acknowledging that the rates throughout the pandemic were ultra-low. This will ultimately curb household spending which will support the slow down of inflation.
So, this was our breakdown of the RBA’s latest report. Did you find this helpful? Let us know on our socials!
*https://www.rba.gov.au/speeches/2022/sp-gov-2022-07-20.html