Inflation
The rate at which prices rise, quietly reducing what each dollar of your money can buy.
Inflation measures the general increase in prices across the economy, tracked in Australia by the Consumer Price Index. The RBA targets 2% to 3% on average over time.
Its effect on savings is corrosive. Money earning 3% while inflation runs at 4% is losing purchasing power every year despite the balance growing.
It also matters for tax. Because brackets are not automatically indexed, wage rises that merely keep pace with inflation can still push you into a higher bracket — an effect known as bracket creep.
The distinction between headline and underlying inflation matters when reading the data. Headline includes volatile items like fuel and fresh food, while underlying measures strip those out to show the persistent trend the RBA actually responds to.
The real return on savings
A savings account paying 4.5% sounds healthy. After 37% tax the return is about 2.8%, and with inflation at 3% the real return is slightly negative.
The bit people get wrong
Your personal inflation rate is not the headline figure. If your spending is weighted towards rent, insurance and energy, you can experience far higher inflation than the published CPI suggests.
Common questions
How does inflation affect my investments?
It erodes the real value of fixed returns such as cash and bonds. Shares and property have historically offered better long-run protection because prices and rents adjust upward.
What is bracket creep?
When inflation-driven pay rises push you into higher tax brackets without any increase in real income, quietly raising your effective tax rate.
Is deflation better?
No. Falling prices sound appealing but tend to accompany weak demand, rising unemployment and increasing real debt burdens.