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Taming inflation

In the 1980s inflation was an economic curse. Prices were rising about 10 percent each year and the purchasing power of money dropped alarmingly.

Mortgage interest rates were averaging 14 percent a year, reaching as high as 17 percent in 1989; and rising wages forced prices up even more.

Although those days are now just a memory, we hope our leaders never forget them and how we got into that mess.

The Reserve Bank of Australia has the responsibility of managing inflation. It has a target to keep price rises between two percent and three percent a year and generally uses interest rates to keep inflation in check.

How is inflation calculated?

The usual measure of inflation is the Consumer Price Index, CPI. The Australian Bureau of Statistics calculates CPI based on sampling a ‘basket’ of 11 goods and services.

This means they have a list of typical expenses such as basic foods, clothing, insurance, housing, and so on; and they check the costs of these items every quarter.

Inflation and you

People often complain that their cost of living is going up faster than CPI. And there will be other people to whom the opposite applies – and they don’t complain. The differences come about for two main reasons.

CPI is an average figure for all of Australia. If you live in Perth or Wollongong, prices could be different to the rest of the country.

You may not buy the things in the ABS ‘basket of goods’.

For instance, if you don’t have a mortgage or drink alcohol, then the published CPI figure will not reflect your experience of price increases.

There is an “alternative”

Gradually rising prices encourage us to buy goods and services and keep the economy growing. The alternative is called deflation – when the overall price of goods and services falls. It means consumers put off spending and the economy stagnates – their thinking is “what’s the use of buying today if it will be cheaper tomorrow?”

In practice, it is impossible to keep prices stable. Australia imports so many goods and services and the cost of these will vary over time depending on supply and demand and the exchange rates.

A word of warning though – it’s easy to be complacent about our success at taming inflation. In the 1920s, inflation in Germany was 2000 percent a month. That meant a daily paper costing $1 at the start of the month would cost $21 by month’s end!

If you would like to understand more about inflation and how it affects you, talk to your financial adviser.

• Robert Goudie is an authorised representative at Meritum Financial Group Pty Ltd AFSL 245569.



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Posted on Feb 26 2015

Posted by on Feb 26 2015. Filed under Finance advice. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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