What is inflation and how does it impact me?

Did you know that the term ‘cozzie livs’ was Macquarie Dictionary’s word of the year? It’s a light-hearted way of referring to the cost-of-living crisis, but it’s far from a joke for anyone trying to make ends meet right now.

There are lots of reasons why we’re paying more for everyday essentials, but one big driver is inflation.

Let’s unpack what inflation is, how it can impact you and your finances – and some measures you can take to make sure you’re not scrounging around for coins in order to make it to pay day.

What is inflation? Understanding the basics

Inflation is a measure for how much the prices of goods and services have gone up over time. It can devalue the purchasing power of the Australian dollar, so you’ll probably notice this first in your supermarket trolley; suddenly, $50 buys you a whole lot less than it used to.

Typically, inflation is measured as a percentage – the rate of change between prices, say, one year ago, and what the same goods and services cost you today. It’s measured and monitored by something called the Consumer Price Index (CPI), which tracks the cost over time of a typical basket of goods and services purchased by households.

The Reserve Bank of Australia’s goal is to keep Australia’s inflation rate between 2-3 percent on average, over time – but right now it’s at 5.4 percent.

Causes of inflation in Australia

There are lots of causes behind inflation, including an increased demand for an item or service, rising costs to produce certain items, and changes in the supply of certain items, particularly food or rental properties. Often this might be due to something completely out of the government’s control, like unforeseen weather events that affect crops.

For example, if wild weather wiped out banana crops one year, prices for bananas would skyrocket due to a massive reduction in supply. This actually happened in QLD in 2016 thanks to Tropical Cyclone Larry – bananas went up by 400%!

Inflation can also be impacted by changes in tax regulations, such as The Reserve Bank changing the cash rate, or introducing the goods and services tax (GST) – when this happened in July 2000, prices of many items went up.

The impact on everyday Aussies

It’s easy to see how inflation might be having a knock-on effect to your household budget, such as:

• Your money buys less because things cost more
• There’s typically a rise in utility bills
• Rent can become increasingly unaffordable for those on a tight budget
• Food, petrol, transport and even healthcare costs tend to rise
• Interest rates rise making it harder to borrow or meet higher remortgage payments.

Adapting to inflation

When your budget is stretched to the limit it can feel overwhelming – so here are some steps you could consider taking to help your household adapt to inflation and the rising cost of living.

1. Look at your incomings and outgoings: Is there anywhere you can cut back? Do you really need three streaming services and to buy your lunch in a food court every day? Chances are, there are lots of small expenses you could radically cut back on – and a money manager tool can help you figure it all out.
2. Save for a rainy day: If you can, start doing it when things aren’t tight financially. Even adding a few hundred to your rainy-day fund or emergency nest egg each month can mean you’re able to manage when the fridge goes on the blink, or you need a bit of help paying the mortgage one month.
3. Consider a side hustle: If you have a skill others will pay for, advertise your services on AirTasker. This could be anything from picking up and delivering furniture, to cleaning houses or helping re-write people’s resumes.
4. Consider where you’re investing: In challenging economic times, experts suggest sticking to assets that hold their value, such as stocks, commodities and property. Spreading your risk out by diversifying your portfolio is also a smart move.
5. Ask for a raise: Your boss knows there’s a cost-of-living crisis going on and if you haven’t had a decent salary bump in a long time, now is the time to negotiate one. If you’re self-employed, consider putting your prices up.

Inflation in everyday life

Over time, inflation can impact many aspects of your daily life – whether that’s your job opportunities, your savings goals or even just your ability to take the whole family out for a movie or a meal. And right now, we’re all wondering how to save money on groceries, too!

Tweaking your budget and looking at where you can cut back is key to managing higher living costs, but it might also mean you need to be more strategic about saving for nights out, holidays or other non-essential things you want to buy.

And when it comes to the big things you’re saving for, such as a property or retirement, the impact of inflation may mean you need to reassess your goals and give yourself more time to meet them.

Talking to a financial planner or money coach about your situation and getting ideas for how you can manage the impacts of inflation on your household budget may also help take the pressure off.

Having the right insurances in place is key in case anything happens to you, helping to protect the lifestyle you’ve worked so hard to build. With Choosi, you can compare a range of life insurance policies online or by calling us on 1300 363 526.