What is Inflation?
Inflation is known as the increase in the cost of goods and services that the majority of families purchase. More precisely, it represents how much more expensive a set of goods and services has become over a certain period, usually a year. Whilst prices typically rise over time, they can also fall—a situation known as deflation.
Inflation in Australia is measured using the Consumer Price Index (CP), this index essentially analyses the percentage change in the cost of a basket of products and services used by households. The Australian Bureau of Statistics (ABS) generates the CPI quarterly by collecting prices for thousands of commodities, which are divided into 87 categories and 11 groups. Every quarter, the ABS determines price changes from the previous quarter and averages them to establish the inflation rate for the total CPI basket.
The impact of inflation extends throughout the economy. Every quarter, the ABS calculates and averages price changes from the previous quarter to estimate the australia inflation rate for the overall CPI basket. This affects everyone—workers, businesses, people on fixed incomes, lenders, and borrowers. For instance, if the same items in your shopping basket cost AUD 152.90 last year and now cost AUD 160.54, that represents inflation in action.
Types of Inflation
Different types of inflation exist in economic theory. At its most fundamental level, Australia inflation can be classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation. These classifications help economists understand the underlying causes and develop appropriate responses.
Australia Inflation
The Reserve Bank of Australia monitors inflation carefully because history demonstrates that low and stable inflation is a prerequisite for a strong economy, sustained full employment, and growth in real wages. Indeed, most economists today favour a low and steady rate of inflation. Low inflation (as opposed to zero or negative inflation) lessens the likelihood of economic recessions by allowing the labour market to respond quickly during downturns.
Monitoring inflation in Australia is crucial because it directly impacts the economy, wage growth rates, mortgage rates, energy prices, interest rates, and investment decisions. Even small price increases on everyday essentials affect personal consumption expenditure patterns. Furthermore, inflation data influences public policy decisions, affecting everything from interest rates to eligibility thresholds for various government programmes.
Throughout Australia’s economic history, inflation has played an important role in shaping monetary policy and economic management strategies. The Government’s approach to measuring and responding to inflation has evolved to maintain economic stability and growth in the Australian context.
What Causes Inflation in Australia?
Australia inflation results from several interconnected factors that affect the economy in various ways. The Reserve Bank of Australia (RBA) identifies three broad categories that drive inflation: demand-pull, cost-push, and inflation expectations.
Increased Money Supply
The RBA’s bond purchase programme significantly impacted Australia’s money supply. From November 2020 to February 2022, the RBA purchased AUD 429.65 billion of government bonds as an emergency stimulus measure. This increase in money supply contributed to inflation, albeit not as directly as some theories suggest. While the ‘money base’ increased dramatically from AUD 177.67 billion in February 2020 to AUD 840.94 billion by July (an increase of AUD 663.28 billion), the broader money supply grew by AUD 954.55 billion. Although this expansion of the money supply contributed to Australia inflation, its effect was moderated by changes in the velocity of money circulation.
Supply Chain Disruptions
Supply chain challenges emerged as a primary inflation driver during the pandemic. Business leaders identified supply chain disruptions as one of the two main challenges facing the Australian industry. These disruptions particularly affected building materials and fuel prices. Additionally, global events like Russia’s invasion of Ukraine caused energy supply disruptions. According to model-based estimates, supply-side factors have driven the majority of the increase in inflation in Australia, accounting for roughly half to three-quarters of the spike.
Rising Production Costs
Production costs have soared across multiple sectors. Energy and gas costs increased by more than 50% over three years, sugar prices rose 46%, and some packaging costs grew approximately 30%. Moreover, cocoa prices spiked by about 200% since late 2023. These elevated input costs pushed up production expenses, causing firms to produce less output while raising prices. Higher energy costs particularly affected inflation through two channels: reducing profit margins (leading to less productivity-enhancing investment) and increasing consumer prices.
Wage-price Spiral
Despite concerns about a wage-price spiral (where increasing wages and prices continuously feed each other), evidence suggests this hasn’t materialised in Australia. The International Monetary Fund defines a wage-price spiral as an episode where both price inflation and nominal wage growth increase successively for at least 3 out of 4 consecutive quarters. However, recent data indicates such an outcome is unlikely—wage increases in newly lodged Enterprise Bargaining Agreements are flat or trending down. Additionally, only 4.4% of agreements lodged with the Fair Work Commission in the first half of the year stipulated wage increases linked to rises in the Consumer Price Index.
How Inflation Affects Australians?
The current inflation wave has profoundly reshaped Australian households’ economic realities in numerous ways. According to the September 2023 data, if you spent AUD 152.90 on goods and services in September 2022, you would need AUD 161.16 to buy the same items a year later.
Impact on Cost of Living
Essential costs have surged dramatically, with housing costs increasing by 22%, food and groceries by 17%, electricity by 17%, and transport by 11%. This has led to over 3.3 million Australians living in poverty—more than one in eight people. Living costs for households reliant on government payments recorded the strongest quarterly rises (+1.0%). Between March 2021 and March 2023, prices of necessities rose between 11% and 36%, forcing 15% of Australian households to go without essentials like food and heating.
Effect on Savings and Investments
The financial squeeze has reduced the household savings ratio to 6.9% in September 2022, below pre-COVID levels. Whilst 82% of Australians save some portion of their monthly income, 36% save only 10% or less. Traditional savings accounts (71%), high-interest accounts (28%), and shares (24%) remain the most popular saving methods. Nevertheless, inflation creates a challenging dynamic—if inflation runs at 6% but a term deposit earns only 5%, savers effectively lose 1% in purchasing power.
Changes in Consumer Behaviour
Faced with rising prices, 82% of Australians have modified their spending behaviours. Most commonly, people look for more discounts (79%) and 58% defer purchases until sales. Many Australians now buy cheaper products (66%), particularly cutting back on groceries (66%), clothing (62%), and entertainment (58%). Thereupon, 54% shop for lower-priced brands more than last year, 80% stock up during sales, and 42% purchase pre-owned items more frequently.
Winners and Losers of Inflation
The impact of inflation varies significantly across demographics. Younger people with mortgages and renters face the harshest effects, especially since 2021, when inflation has risen by 17% while wages have grown by only 13%. Conversely, higher interest rates have benefited those with substantial savings, superannuation returns, and bank deposits. This has enabled a “boomer spending spree” on tourism and recreation. Moreover, corporate profits reached their highest share of GDP ever in 2022, whilst lower-income households, with less financial buffer and fewer savings, experienced disproportionate hardship.
How Inflation is Managed in Australia
The Reserve Bank of Australia established a systematic approach to inflation management in the early 1990s, moving away from earlier monetary frameworks like money targeting and the ‘checklist’ approach.
Related Article: A Deep Dive Into The History of Money
The Reserve Bank of Australia (RBA)
The RBA is responsible for managing Australia inflation. Its primary objectives include supporting price stability, employment, economic development, and the well-being of the Australian people. The Monetary Policy Board, which meets eight times annually, makes decisions about appropriate monetary policy settings. Equally important, the RBA collaborates with the Australian government, as indicated by the latter’s fiscal approach, which lowered inflationary pressure by returning 87% of revenue enhancements to the bottom line across two budgets.
Inflation Target (2–3%)
Australia has a flexible inflation goal aimed at keeping annual consumer price inflation between 2% and 3%. This target was formally established in 1996 through an agreement between the RBA and the Government, documented in the Statement on the Conduct of Monetary Policy. Notably, in December 2023, this statement was amended to state that the RBA determines monetary policy with the expectation that inflation will return to the midpoint of the goal. The 2–3% range was chosen primarily because it is sufficiently low that inflation does not significantly influence economic decisions, yet avoids deflationary risks.
Monetary Policy Tools
The RBA’s primary tool for managing inflation is the cash rate target. Yet during economic challenges like the COVID-19 recession, the bank actively employed additional tools, including:
- Forward guidance: public commitments about future monetary policy conditions
- Government bond purchases with explicit price and quantity targets
- Term Funding Facility (TFF): providing low-cost, fixed-term funding to financial institutions
Recent Trends in the Australia Inflation Rate
The Consumer Price Index remained steady at 2.4% per annum in the March 2025 quarter, marking the third consecutive quarter within the RBA’s target range since the pandemic. Likewise, the Trimmed Mean Inflation was 2.9% in March—the first quarter since 2021 in which both headline and underlying inflation stayed within the target band. Previously, from December 2014 to early 2025, inflation was within the target band for merely eight of 43 quarters, often falling below 2% rather than exceeding 3%.
What is the current Australia inflation rate?
As of the March 2025 quarter, the Consumer Price Index in Australia remained steady at 2.4% per annum, marking the third consecutive quarter within the Reserve Bank of Australia’s target range since the pandemic.
How does inflation in Australia affect the cost of living there?
Inflation has significantly impacted the cost of living in Australia, with essential costs surging dramatically. For example, housing costs have increased by 22%, food and groceries by 17%, electricity by 17%, and transport by 11%, leading to financial strain for many households.
What measures does the Reserve Bank of Australia use to manage inflation?
The Reserve Bank of Australia primarily uses the cash rate target to manage inflation. During economic challenges, they also employ additional tools such as forward guidance, government bond purchases, and the Term Funding Facility to provide low-cost funding to financial institutions.
How have Australians changed their spending habits due to inflation?
In response to rising prices, 82% of Australians have modified their spending behaviours. Common changes include looking for more discounts (79%), deferring purchases until sales (58%), buying cheaper products (66%), and cutting back on groceries (66%), clothing (62%), and entertainment (58%).