Inflation takes off, prompting a rate rise for Australians

The word ‘inflation’ doesn’t only dominate business news headlines, but finds its way into general news reports too.

What is inflation and how does it affect you?

In simple terms, inflation (or the Consumer Price Index) signifies a rise in the price of goods and services, meaning you pay more for every purchase you make. In order to measure inflation, every three months the Australian Bureau of Statistics prices around 100,000 goods and services.

They account for almost everything we buy, in different parts of Australia. Then it groups these 100,000 or so prices into 87 expenditure classes, such as furniture, rent, bread, and breakfast cereal.

What is the current inflation rate?

Usually, only 50 or so of the 87 categories climb in price. But in the March 2022 quarter, a massive 70 categories climbed in price. According to Deutsche Bank economist Phil O'Donaghoe, that's the most in the 72-year history of the consumer price index!

Moreover, the Australian Bureau of Statistics divides the 87 classes of goods into "non-discretionary" and "discretionary". For instance, it classifies bread as non-discretionary, biscuits as discretionary; petrol as non-discretionary, new cars as discretionary, and so on.

In the year to March, non-discretionary inflation (the price rises we can't avoid) was 6.6% – well above the official inflation rate of 5.1 %, and the highest in records going back to 2006. On the other hand, discretionary inflation – (price increases on the items we can live without) was only 2.7 %.

Reserve Bank of Australia increases the cash rate

At its monthly meeting on 3rd May 2022, the RBA Board decided to increase the cash rate target by 25 basis points to 35 basis points. According to the RBA, "The outlook for economic growth in Australia also remains positive, although there are ongoing uncertainties about the global economy arising from: the ongoing disruptions from COVID-19, especially in China; the war in Ukraine; and declining consumer purchasing power from higher inflation. The central forecast is for Australian GDP to grow by 4¼ % over 2022 and 2% over 2023."

Does the US influence Australia’s inflation rate?

It is not a surprise that countries in today’s world are more connected than ever before. Therefore, a rise in US inflation rates will impact the Australian economy too, along with other countries.

However, the degree and timing of its impact will vary. For example, a rise in labour costs in the US may have a limited impact on Australians; however, an increase in the price of iPhones or Nike shoes in the US will reflect in their price in Australia too.

What will be the impact of rising US inflation on Australia’s economy?

Interest rate movements made by the US Federal Reserve Bank (the Fed) are closely monitored by central banks worldwide, including the Reserve Bank of Australia (RBA). In recent times, many developed economies, including the US and Australia, have reduced interest rates to boost their economies. With rates nearing all times lows there is an expectation that rates will increase due to the strong performance of those economies. Quite often when the Fed increases its interest rate, Australia is quick to follow suit.

The cost of borrowing funds (home loans, business loans, personal loans etc) will increase, leading to a rise in the inflation rate, making goods and services more expensive. Rising inflation rates can also negatively impact the Australian dollar, where one AUD buys less USD than it may have done previously.

This also affects tourists who may have to convert money before travelling, and can negatively affect individuals’ capacity to save money, especially if their incomes do not rise by the same rate as inflation.

What will be the effect on investors?

A rise in inflation affects investment markets negatively due to higher interest rates, volatility in the economy, and uncertain share prices.

For mum and dad investors, rising interest rates mean paying more interest on their home loan, which reduces their disposable income and, in turn, reduces their capacity to invest. Growth in share prices can be volatile, meaning it will take them longer to build wealth.

For retirees, an increase in the price of goods and services at a time of share market volatility can lead to having to sell more of their investment assets (potentially at a loss or reduced profit). Also, there could be uncertainty in dividend income, which many retirees often rely upon. Retiree investors will have fewer years to recover from a drop in their portfolios compared to younger investors.

5 steps to prepare for a rise in inflation
  1. It is important to first analyse your personal cash flow situation to understand where your money goes.

  2. Consider fixing at least part of your home loan to limit your exposure to rising interest rates.

  3. Reconsider new personal loans, such as car loans. Do you need to take on new debt when interest rates are likely to increase?

  4. For the risk-taking investor, it can be tempting to invest more money into shares when prices are falling, but always consider averaging your position to avoid market timing risk.

  5. For investment purposes, consider having exposure in well-established markets. Investors often find comfort knowing their funds are exposed to good quality companies with strong balance sheets.

If the thought of rising inflation leaves you feeling unsettled, be sure to talk to a professional financial adviser. Your adviser will review your financial position, your ability to meet your financial obligations, as well as identify strategies to outpace inflation.

Please speak to us so we can look at your current personal circumstances. You can reach us anytime on 07 3396 8518 or book a no-cost, no-obligation Discovery meeting at


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Investment Zone is here for you. Arrange a no-cost, no obligation appointment with Senior Financial Planner Brad Macaulay at


The information in this communication has been prepared on a general advice basis only. The advice has been prepared without taking account of your specific objectives, financial situation or needs. Accordingly, you should, before acting on the advice, consider the appropriateness of the advice having regard to your objectives, financial situation, and needs. In cases where the advice relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure Statement (or other relevant information statements) and consider such document before you make any decision about whether or not to acquire the product. For these reasons, it is imperative that you seek advice from your financial adviser before making any investment decisions. Investment Zone Pty Ltd (ABN 18 104 622 611) provides financial services as a Corporate Authorised Representative no. 296974 of Financial Force Pty Ltd ABN 42 091 425 464, AFSL no. 238337

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