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What is inflation rate?

Periods of high inflation can take a toll on the economy, impacting currency value and purchasing power. What is inflation rate, how is it calculated, and what is the current inflation rate in Australia? We’ll explore these questions below.

Understanding inflation rate

Inflation figures relate to what you can buy with your money. When inflation rates rise from one year to the next, this means that an Australian dollar holds less purchasing power than it did last year. Purchasing power is assessed by looking at the average increases in price of a selection of goods and services over time. This price rise is usually expressed as a percentage to show inflation rate. By contrast, when consumer prices decline and purchasing power increases, this is an example of deflation.

Inflation rates are important to track because when your country’s currency loses its value and prices rise, the average cost of living increases accordingly. This has a knock-on effect for the economy, stalling economic growth. At this point, a country’s central bank will usually step in to manage the money supply and interest rates.

How is inflation measured?

There are several ways to measure inflation, but the most common is by tracking the Consumer Price Index (CPI). This takes a selected basket of goods and services and measures the percentage of change in price over time. The Australian Bureau of Statistics (ABS) publishes the country’s CPI once per financial quarter, grouping thousands of consumer goods into 87 expenditure classes and 11 groups.

To collect these prices and track them from one quarter to the next, the ABS collates data from sources like department stores, retailers, and supermarkets. It also tracks real estate and utility prices. These various prices are weighted depending on their typical use in the average Australian household. For example, if households spend more of their income on one product class over another, that product class will be given more weight in the final CPI per year calculation.

In addition to using CPI per year, you can also look at underlying inflation. Underlying factors include price changes due to things like supply disruptions or changes to tax regulation.

Using the inflation rate formula

You can calculate inflation using changes in the CPI from one period to the next. Here is one inflation rate formula:

Inflation Rate = (Final CPI Value / Initial CPI Value) x 100

If you’re looking at inflation for a single item, you can use this formula instead:

Inflation Rate = (Final Price – Starting Price) / (Starting Price) x 100

Fortunately, there are numerous inflation calculators online that will figure out these rates for you.

What is the current inflation rate in Australia?

According to the Australian Bureau of Statistics, the country’s annual inflation rate rose from 0.9% in Q4 of 2020 to 1.1% in Q1 of 2021. This is the highest rise since the same time last year, with contributing factors like government schemes and home building grants.

Looking at price changes in specific sectors, prices increased for:

  • Food

  • Alcohol and tobacco

  • Home furnishings

  • Transport

  • Recreation

  • Insurance and financial services

Consumer prices fell in the following sectors:

  • Housing

  • Education

  • Communication

As you can see, inflation figures hit different industries in different ways.

Why are inflation figures important?

It’s important to understand a country’s inflation rate because it impacts the economy in numerous ways. Inflation rates will change a country’s currency value and interest rate parity. It also determines how easy it is for consumers and businesses to access bank financing, and should be considered in any cash flow forecasting for businesses. Ideally, a low inflation rate of about 2% per year keeps the economy in check without cutting into consumer purchasing power.

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