There's a prevailing sentiment that the cost of living has skyrocketed in recent years. Whether it's the price of groceries, housing, education, or healthcare, it feels like every aspect of life comes with a heftier price tag. But why does it seem that living is more expensive now compared to a decade ago?
One of the most significant contributors to the increased cost of living is inflation or CPI. Over the past decade, inflation rates have fluctuated, but overall, prices have tended to rise. This means that the purchasing power of money diminishes over time, leading to higher prices for goods and services. It promotes the spending of money now because the same dollar loses purchasing power in the future.
So what is inflation?
Imagine you have a favourite sandwich that you buy every week. Last year, it cost you $5, but this year, when you go to buy it, it's $6. That's inflation in action. Inflation shows that over time, the prices of goods and services tend to go up. This happens because the cost of making things, like sandwiches, also goes up.
Factors like increased wages for workers (we all want a pay rise!), higher rent for businesses, and rising costs of raw materials can all contribute to inflation. This also means the government receives more in tax receipts (think GST and stamp duty as examples) which can lead to further inflationary spending.
When prices rise, your money doesn't go as far.
In Australia the RBA aims to keep inflation within a target band of 2-3% to help maintain a stable economy with ‘stable prices’. When inflation is too low, it can indicate weak demand for goods and services, potentially leading to unemployment and sluggish economic growth. On the other hand, if inflation is too high, it erodes people's purchasing power and can create uncertainty.
Striking a balance between these extremes provides businesses and consumers with a clear expectation of future price movements, which helps them make informed decisions about spending, investing, and saving. Additionally, keeping inflation within a target band helps maintain confidence in the economy, which is essential for attracting investment and promoting overall economic stability.
Changes in consumer behaviour and lifestyle expectations have also contributed to the perception of increased living costs. With the rise of social media and the culture of constant comparison, people are often bombarded with images of a lifestyle that may be financially out of reach for many. This pressure to keep up with the latest trends and maintain a certain standard of living can lead to increased spending and financial stress.
Inflation is not a 500-word conversation and there are many viewpoints on the good, the bad and the ugly sides of it. Add in the ways that central banks use monetary policy to fight high and low inflation and you quickly begin a spiral towards opinionated and political outcomes.
Click on the link below to see the RBA education page that explains inflation and target bands in more detail - Click Here
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