According to the latest data from the Australian Bureau of Statistics (ABS), CPI rose 0.6 per cent in the March 2021 quarter and annual inflation increased to 1.1 per cent the lowest annual movement on record.
CPI (the universal acronym for Consumer Price Index) indicates the economy’s inflation rate, the percentage increase/decrease of the actual cost of essential products and services, the buying power of your dollar. That’s why it’s often called a ‘cost of living’ measure.
The ‘basket of goods’ used as a reference for CPI is a standardised collection of costs chosen to measure economic impacts on an average household. It includes basic requirements like food, home equipment, clothing, communications, medical and transport services, energy, education and the cost of housing itself (rents and mortgages). The ‘basket’ remains consistent in order to illustrate price changes over time which is represented as a percentage of growth (inflation) or negative growth (deflation).
Very low inflation figures suggest the economy is growing slowly, it’s underperforming and weak. Very high inflation indicates a ‘boom’ in spending and when extreme, suggests spiralling production costs and ‘overheating’ which can make it vulnerable to a ‘bust’. Staying comfortably between these two extremes is the aim of economic and political administrators and the indicator of a healthy and robust economy.
If inflation is stagnating the Reserve Bank can drop official interest rates to stimulate spending and this is what we’ve seen in recent years to counter the economic impacts of the COVID-19 pandemic. If inflation begins to increase too rapidly the Reserve Bank can make the decision to raise interest rates to slow spending and ‘put the brakes on’ the economy. The current expectation is that this won’t happen until 2024 but when it does, it will affect the cost of mortgages in Australia.
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