Quite frankly, if you’re not an economist, these phrases can be hard to wrap your head around. Yet, it’s had a significant impact on our hip pocket. So, in this article, we will explore what inflation is, why it matters, the cost of living crisis, and some helpful tips and tricks to get your finances in order.
What is inflation & why does it matter?
It’s permeated almost every aspect of life. Inflation is something none of us can avoid – even if we try. But what is inflation? According to the International Monetary Fund, inflation is defined as:
”“A sustained increase in the price of goods and services over time. It's a broad measure that can refer to the overall increase in prices or the increase in the cost of living.” – International Monetary Fund.
There are a number of factors that cause inflation: global crisis, conflict, the pandemic, supply shortages, and demand outweighing supply. It has been speculated that an increase in mental health conditions may be associated with these economic pressures. The ABC reports that 50% of young people are experiencing mental ill health. Despite this, in the State of Mental Health in Australia report by the Black Dog Institute, 50% of people surveyed reported excessive cost as the primary barrier to accessing help.
Inflation in practice
We have seen price rises in almost every aspect of daily life. Groceries, utilities, travel, and more have seen significant price increases, and many of us feel the pinch. It is important to note: inflation is an everyday fact of life. If we liken prices to the early 1950s, everyday goods would have been cheaper back then compared to contemporary times.
Prices inevitably increase over time. However, what has the world’s attention is the pace at which prices have risen over the past few years. For example, the inflation rate was 7.8% at the end of 2022 compared to 3.5% two years prior. While the rate has dropped considerably – 2.4% in late 2024 – Aussies are still feeling the pressure, especially due to high interest rates that were implemented to quell the pace of inflation (we’ll get to that in a moment).
According to the Salvation Army, dairy products have seen an annual increase of 14.9%, bread and cereal 11.8%, and general food products 11.3%. As a result, 40% of Aussie households struggle to afford basic essentials.
What’s the deal with interest rates?
Often synonymous with economic uncertainty and stress, interest rates have become a major talking point across Australia. And, in fact, the world. Designed to potentially stall economic activity, interest rates were hiked to slow spending, and curb inflation. Here’s everything you need to know about interest rates:
- Firstly, what are interest rates? Interest rates are the amount of interest added to a loan by a lender (i.e. a bank). For example, when you take out a mortgage, there’s usually an associated interest rate, such as 2%. Put simply, interest is essentially the amount of money you owe on top of the amount you’ve borrowed.
- Why do banks and lenders charge interest? There’s a risk that the borrower may not be able to repay their loan, so banks charge interest to mitigate this risk. If assessed and deemed less risky, your interest rate may be lower. It’s also a way for banks and lenders to generate profits.
- Who controls interest rates? When inflation is particularly out of hand, peak bodies may impose interest rate increases to bring it under control. In Australia, the Reserve Bank of Australia monitors the Australian economy and ensures prices are stable and that there are enough jobs and economic stability. The RBA is the body that controls interest rates and can increase or decrease them.
- How do interest rates curb inflation? To counteract inflation, governments and bodies need to minimise spending. To do so, they may increase interest rates to make it more expensive to borrow money. Ultimately, this can reduce spending and demand for goods, which should stabilise prices over time. However, there is a risk this could trigger a recession (but that’s for another article).
- How do interest rate increases impact me? When interest rates rise, we can all feel anxious and financially burdened when our monthly payments on debts and loans surge. As a result, we have less money to spend, which can impact our ability to afford essential goods. Ultimately, this can test our mental wellbeing and may cause more people to report mental illnesses and conditions.
How you can control your finances with three simple hacks
We’ve covered many tricky terms that, we hope, informs you on why we’re experiencing a cost of living crisis. But empowerment is key, so we have some helpful tips that outline how you can save money and control your spending during the current economic climate:
- Smooth those bills! Many service providers for key utilities such as electricity, gas, and insurance offer bill smoothing. This means you can break down your bills into manageable payments instead of being forced to pay your bills in one lump sum, which can make it easier for you to budget.
- Create a budget: We probably sound like a broken record here, but create a budget. Identify how much money comes in each month, minus your bills – i.e. rent or mortgage payments – and then minus living essentials, such as groceries. Then you’ll know how much you have left to save.
- Don’t go big – to begin with: Sometimes, we think we need to radically save during economic uncertainty – which can make us highly stressed. We can also become overwhelmed by the mounting bills on our kitchen table. So, try starting small. Focus your energy on one area at a time. Track your spending to see where you can reduce it. It could be as simple as substituting a named brand item for a much cheaper home brand item in the supermarket.
Financial coaching is here with Converge
At Converge, we offer a range of services, including financial coaching. If we’re your EAP provider, visit our website or the Converge App to book an appointment with one of our financial coaching experts. We’re here to support you anytime, anywhere!
