Rising prices have been a hot conversation topic both in the news and within our day-to-day lives. The cost of living squeeze is impacting us all—individuals and businesses alike. Prices have risen rapidly this past year, with some items (petrol, lettuce) rising astronomically in price seemingly overnight. The speed of this change in price level is called the rate of inflation.

In June 2022, Australia’s rate of inflation reached 6.1%, becoming the fastest annual increase in inflation since 2001. The rate of inflation is predicted to continue to rise for the remainder of this year. We shouldn’t be expecting the price of goods and services to get cheaper any time soon, though there is an end in sight. Inflation has been predicted to peak at 7.2% by the end of this year. 7% inflation is historically considered to be very high for Australia. We don’t often see inflation over 7%.

Economists are anticipating inflation to begin to decline later this year due to a combination of factors. Main causes of inflation are not likely to last, and due to the increases in the cash rate and interest rates we have seen.  Whilst inflation is tipped to slow down, prices of some goods and services are expected to stay at their new, higher price point.

Why is the rate of inflation so high?

Higher energy prices are one of the contributing factors to the high rate of inflation. Russia’s invasion of Ukraine has led to increases in the price of gas. Since May, the price of gas has doubled. These price rises are expected to push inflation even higher in the coming months.

Higher prices for the goods of imported goods have also playing a big role in the increased inflation rate. During the pandemic, there was an increased demand for goods. The increased demand has been difficult for retailers, who struggled with demand. Increase in demand has increased prices, particularly for goods imported from abroad.

Businesses are also charging more for their products because of the higher costs they face, including cost of production and labour costs.

What does high inflation mean for individuals?

Simply put, high inflation means an increase in the cost of living. You will be able to buy fewer items with the same amount of money than you did before. Cost changes will vary. The price of some things will go up more than others.

The real difference lies between your overall cost of living changes compared to changes in your income. If prices go up but your income stays the same as it was a year ago, you will be feeling the rate of inflation more severely.

What is being done about high inflation?

The Reserve Bank of Australia (RBA) is tasked with maintaining the inflation rate. The target rate for inflation in Australia is between 2 and 3 per cent on average. When outside pressures being to put strain on the level of inflation, as they currently are, the RBA can increase the cash rate—the price the big retail banks pay to borrow money in the overnight cash markets. Increasing the cash rate directly impacts the rate of interest charged by banks. This is a critical lever the Reserve Bank uses to regulate economic activity. The RBA chose to increase the cash rate in May 2022—the first increase in the official cash rate since November 2010. Following the May 2022 increase, there have been three additional rate increases from the RBA.

Higher interest rates make borrowing more expensive and encourages saving.  Both of these factors reduce how much people spend overall, helping to push inflation down, though it does not happen overnight and will take some time. We are likely to see the rate of inflation come down towards the end of 2022 and beginning of 2023.