Well, it’s been decades since we have been too concerned with inflation but in the last few years, it has come back with a vengeance. In any case, let’s revisit the basics so you understand the difference between fact and fiction.
When the inflation phenomenon is addressed it is usually measured by the rate of change in inflation as represented in the chart above. This chart represents the change in the level of a basket of goods and services over time in Australia since September 1972- December 2023.
The Consumer Price Index (CPI) is a quarterly measure of inflation published by the Australian Bureau of Statistics (ABS).
In Australia, the CPI is calculated by the Australian Bureau of Statistics (ABS) and published once a quarter. To calculate the CPI, the ABS collects prices for thousands of items, which are grouped into 87 categories (or expenditure classes) and 11 groups. Every quarter, the ABS calculates the price changes of each item from the previous quarter and aggregates them to work out the inflation rate for the entire CPI basket.
We need to define the difference between “nominal” and “real” returns. Nominal dollars or returns are measured in the face value ie) what you got paid or paid. Real dollars or returns are measured after adjusting for inflation. It is possible to have a positive return in “nominal” terms but be negative in “real” returns. I have provided an example below where your wages don’t keep up with the rate of increase in the costs of the goods and services you buy. Your wages went up by 10% over the period but your costs went up by 15% over the same time.
As we can see the rate of change in inflation is indeed slowing and has returned to just above 3%. What this means is that the prices of the basket of goods are NOW increasing at a rate of just over 3% per annum.
What we have to appreciate is the fact that the actual level of the price of the basket of goods is significantly higher than what it was in 2020. Therefore, if your income has not risen at the same rate then you are going backwards in real terms. A long-term graph of cumulative inflation in Australia can be seen on the chart below
For example in 2020 a basket of goods and services used for the CPI basket cost $100.
At the end of 2023, the same basket of goods and services cost $115.
Therefore, the basket was increasing at a rate of about 5% per annum over that time. If your wages or income did not go up by the same amount then you have got left behind in real terms. For example, let’s say over that period your income went up by 10% then given the basket costs $115 at the end of 2023 then you could not afford to buy the whole basket. This is the silent impact of inflation on how it takes from one party and redistributes to another.
Article by: Rob Coyte, CEO, Shartru Wealth Management