Why inflation means you're earning less.
One of the hottest economic topics of discussion currently is whether or not the RBA will increase the cash rate and therefore interest rates based on the rising rates of inflation which is currently sitting at 3.5%. “While inflation has picked up, it is too early to conclude it is sustainably within the target band,” Dr Lowe said. “The board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”
It is important to remember that the goal for low inflation is that the general level of prices are rising 2-3% on average over time, which shows that due to the lows of the pandemic (where deflation was experienced) we have not yet on average moved into that target band.
Another factor which is impacting why the RBA is reluctant to increase interest rates until at least late 2022 is the weak increases in wage growth and GDP growth domestically. In terms of wage growth, it most recently increased to 2.2%, which means that on average labour resources are earning 2.2% more. However if prices are increasing at 3.5%, this means that in reality real wages are falling. When you take away the impacts of inflation it means that on average households have less income overall and therefore are materially worse off.
This obviously then has massive on flow impacts into other areas of the economy and means the RBA is more likely to keep the cash rate low to stimulate spending as any cash rate hike could very quickly limit economic activity and harm Australia's economic outlook in the immediate future.