Inflation - What it is, and why it affects us differently.

The word Inflation is everywhere at the moment and seems to be a term we hear every day, but what is inflation and how does it impact you.

Inflation is the increase in the price of the goods and services over a given period of time and is often referred to as the “cost of a basket of goods”. Most of us have heard this phrase as well as the acronym CPI (Consumer Price Index) from governments and the Reserve Bank of Australia (RBA) but that’s where our understanding ends. So, what is this magical basket of goods and how is it worked out?

CPI is calculated by the Australian Bureau of Statistics (ABS) which collects the prices of thousands of items broken into 11 categories and calculate the change in price from the previous period. For example: 

Loaf of Bread in 2024	Loaf of Bread in 2025	Inflation
$5	$5.15	3%

 Although to make this a little more confusing they weight these categories differently based on what most of us spend a higher majority of our income on, such as housing.  The illustration below shows what these categories are (Basket of goods):

But to make this simple let’s use an easy example, let’s say we get paid $100 for the year and we buy 100 apples for $1 each. Now if inflation on apples is 3% it means those apples now cost $1.03 each. If our $100 wage does not change it means now we can only buy 97 apples, and we are worse off than last year. This is why it is so important for our wages to increase at least at the rate of inflation otherwise our standard of living decreases as each year we can buy fewer and fewer apples.

 What does the inflation rate mean to my household budget?

 Outside of the RBA using this figure as an indicator to increase or decrease interest rates which will affect your home loan interest rate, the inflation rate you hear on the news means absolutely nothing to you as an individual, as no one household will experience inflation the same way. The reason for this is that inflation is the average of the price rises in this proverbial “basket of goods”, using a complex equation only math nerds will appreciate so I will leave that out.

 Like with most averages you will never actually meet an average person. For example:

-            In Australia the average family has 1.2 children (I have never met a family with .20 of a child)

-            Per household, Australians own 2.05 cars (I don't even know what 5% of a car is)

-            In Australia, the average household owns 1.6 dogs (I can imagine that .6 of a dog has a hard time chasing cats)

In the real-world inflation on the household budget will be highly dependent of several factors such as age, consumer preferences, people in a household and location. If you are lucky to live in a wonderful council like mine where they have decided to increase land rates by 64%, the inflation in your household budget may be a lot higher than that of your friends.

 Again, to make this simple let’s meet Jack and Ella. Both earn $100 a year, but spend this money differently, Jack loves apples and Ella loves oranges. In 2024 both oranges and apples cost $1, but in 2025 apples increase to $1.03 and oranges increase to $1.06 as in the real-world inflation is not even across all goods. So, what does this mean for Jack and Ella. 

Goods	2024 Cost	2025 Cost	Inflation
Apples	$1.00	$1.03	3%
Oranges	$1.00	$1.06	6%

 Well as we can see if neither get a pay rise, they are both are worse off in 2025 but due to Ella’s preferences her households standard of living is worse as she can now only afford to buy 94 oranges where Jack can buy 97 apples. In the real world this is played out across the thousands of things you as an individual need to buy in a year, which is why when the cost of living starts to bite you may find yourself reaching for the apples over the oranges.

 As we are all unique individuals with unique circumstances the best way to understand how inflation is impacting you is to make sure you are actively budgeting and understanding where your money is going.