Understanding Inflation

What is inflation?

Inflation is when money loses its purchasing power and hence there is an increase in the prices of goods and services that households typically consume.
Another way to think of it is that a dollar is worth less today than a dollar a year ago.

What is inflation supposed to be?

You maybe have heard in the news that the Reserve Bank of Australia (RBA) aims to keep inflation at 2-3%. By maintaining inflation at an acceptable level – it preserves the purchasing power of money and encourages sustainable growth within the Australia economy – which benefits everyone.

In recent years post COVID – this has spiraled out of control and peaking at 7.8% in December 2022.

Case Example of Inflation #1

Steven is given $100 for his birthday on 1st Jan 2025 by his loving wife Cynthia. He leaves this money in his wallet.

Inflation is at 5% in 2025.

On the 1st Jan 2026 – 1 year later- this $100 is now valued at approximately $95

He has lost $5 in approximate value.

Case Example of Inflation #2

Daniel puts $100 in a regular bank transaction account on 1st Jan 2025 to buy a collectible.
Inflation is at 3%
He now wants to buy that collectible a year later: he will need $103 dollars to buy it.

Case Example of Inflation #3

2L of milk and a loaf of bread costs $10 in 2025
Assuming 3% inflation:
2026: $10 x 1.03 = $10.30 (increase of $0.30 since last year)
2027: $10.30 x 1.03 = $10.61 (increase of $0.31 since last year)
2028: $10.61 x 1.03 = $10.93 (increase of $0.32 since last year)
2029: $10.93 x 1.03 = $11.26 (increase of $0.33 since last year)

In 4 years, the cost of 2L of mild and a loaf of bread is now $11.26 compared to $10.

Why understanding inflation is important?

Bottom line: leaving money as cash or in a regular bank account is losing money. We need to find productive things to do with our money so its value doesn’t erode with inflation.

What can I do right now?

All cash and money (if not invested elsewhere) should be in a High Interest Savings Account (HISA).
If you have money you know you wont need for at least 7 years – consider investing it into: property, shares etc – as this have greater returns but only if you plan to keep this money invested for longer.