Unpacking Inflation

Inflation measures how fast prices are rising.

And when inflation is too high, you can feel it.

When you’re shopping for groceries, buying new clothes or paying the rent, the prices you pay for the things you need are increasing too quickly, and it’s hard to keep up.

If prices rise faster than your wages, you might have to make some tough choices:

• Have savings? You may need to use them to buy essential things, meaning you won’t have as much for a rainy day.
• Don’t have any savings? You might have to go without things you want or need.

Higher prices add pressure to household budgets: bills can pile up, activities get cancelled and life can feel more stressful.

But it doesn’t stop there: high inflation can feed on itself and quickly get out of control.

As prices rise, businesses could face higher costs for the materials and equipment they use to make their products. To stay afloat, they may need to pass on these higher costs to their customers. Which means even higher prices.

If business costs keep rising, they might be less inclined to invest and expand – which robs the economy of opportunities to grow and create new jobs into the future.

These are just some of the reasons why high inflation hurts everyone.

And this is why it’s the Reserve Bank of Australia’s job to keep inflation low and stable.

When inflation slows down, that doesn’t mean prices will go down too.

Let’s start here: inflation measures how quickly prices are rising in an economy.

The Australian Bureau of Statistics measures inflation by monitoring a ‘basket’ of goods and services that are typically purchased by Australian households.

This basket contains thousands of items – from clothing and footwear to medicines to airfares.

Rapidly rising inflation leads to higher prices, on average, across all of the goods and services in this basket.

And here’s the thing: price rises during a period of high inflation get locked in.

When the inflation rate slows down, prices on average are not coming down. They are just rising more slowly.

Households are stuck with these higher price levels.

The longer inflation is a problem, the higher the new ‘locked in’ level of prices will be for all households.

This is one important reason why the Reserve Bank of Australia tries to keep inflation low and stable.