Inflation basically means ‘prices going up’.
For example, let’s say the price of your average weekly supermarket trolley was $100 at the start of 2015. Chances are this same trolley, containing the exact same items, now costs about $120 in mid 2022.
The ‘inflation rate’ is a measure of the speed living costs are going up over time. High inflation means the price of things is going up quickly. Low inflation means they are fairly steady.
Inflation is one of the most relevant economic measures for consumers as it affects their purchasing power. It has an impact on everything from fuel prices to furniture, as well as things like the price of train tickets and the cost of shopping.
If the rate of inflation is 1 per cent, it means that, on average, prices are higher by 1 per cent than they were a year ago. For example, a loaf of bread that cost $3 one year ago will now cost you $3.03.
A high inflation rate means people can buy less for the same amount of income they earn. It means having to spend more income on food, energy bills and filling up their car.
How is inflation measured?
The main measure of inflation is the Consumer Price Index (CPI) which is calculated by the Australian Bureau of Statistics (ABS) every three months. It tracks the price of a ‘basket’ of goods and services which has been carefully designed to reflect the main typical expenditure items for metropolitan households.
The ‘basket’ covers a wide range of goods and services, in the following eleven groups:
- Food and non-alcoholic beverages
- Alcohol and tobacco
- Clothing and footwear
- Housing
- Furnishings, household equipment and services
- Health
- Transport
- Communication
- Recreation and culture
- Education
- Insurance and financial services
The items used in the basket to measure price inflation are reviewed over time to reflect the public’s spending habits. The ABS carry out Household Expenditure Surveys regularly to understand what people typically spend on.
Inflation and retirement
The government’s Age Pension level is regularly updated by looking at CPI (plus a similar basket that looks at what pensioners typically spend on) as well as being benchmarked against average salaries. The intention of this is to help pensioners maintain a certain standard of living relative to the rest of the population.
Retirees who desire a lifestyle that costs more than the Age Pension provides must use their own savings and superannuation to generate the extra income for life. Jubilacion offer a service for people to get their maths right with all of this, to avoid outliving their savings.
Inflation causes your spending in retirement to increase over time. Your retirement calculations will need to make an allowance for these increases when determining things like how much you need to retire, and how much you can spend safely each year in retirement.
There is an element of uncertainty to how much future prices will increase over the decades a person spends in retirement. Between 2010 and 2020, CPI averaged 2.55% per year. But more recently inflation has shot up. For the year to September 2022 it was 7.3% !
Jubilacion’s approach to inflation is to stress test a full range of possible inflation scenarios – to give confidence that your retirement can weather whatever the future brings.
To discuss how inflation might impact your retirement decisions, drop us an email, give us a call or feel free to book a free trial of our service.
