Question 1

What is inflation and how does it affect my money?

Accepted Answer

Inflation is the general increase in prices of goods and services over time, which reduces the purchasing power of your money. If inflation averages 2.5% per year, something that costs $100 today would cost about $128 in 10 years. This means your savings buy less over time unless they grow at or above the inflation rate.

Question 2

What is the Consumer Price Index (CPI)?

Accepted Answer

The Consumer Price Index (CPI) is the main measure of inflation in Australia, published quarterly by the Australian Bureau of Statistics (ABS). It tracks the price changes of a "basket" of goods and services that typical Australian households buy, including food, housing, transport, health, and education. The annual percentage change in CPI is the most commonly quoted inflation rate.

Question 3

What is the difference between real and nominal values?

Accepted Answer

Nominal values are the actual dollar amounts at a given time, without adjusting for inflation. Real values are adjusted for inflation to reflect true purchasing power. For example, if your salary rises from $80,000 to $82,000 (nominal increase of 2.5%) but inflation is also 2.5%, your real salary has not changed — you can buy the same amount of goods and services as before.

Question 4

Why does inflation matter for my savings and retirement?

Accepted Answer

Inflation silently erodes the value of cash savings. At 2.5% annual inflation, $100,000 in savings loses about 22% of its purchasing power in 10 years and about 40% in 20 years. This is why financial planners recommend investing in assets that outpace inflation, and why superannuation growth targets are often expressed as "CPI + X%".

Question 5

What is Australia's historical average inflation rate?

Accepted Answer

Australia's long-term average inflation rate is approximately 2.5% per year. The Reserve Bank of Australia (RBA) targets an inflation rate of 2-3% over the medium term. However, actual inflation can vary significantly year to year — it has been as low as near 0% and as high as double digits during the 1970s and early 1980s.

Question 6

How is this calculator different from a compound interest calculator?

Accepted Answer

A compound interest calculator shows how your investments grow over time. An inflation calculator shows how the purchasing power of a fixed dollar amount changes over time. Ideally, you want your investment returns (from the compound interest calculator) to exceed the inflation rate (shown here) so your real wealth increases.

Inflation Calculator

Inflation Settings

Summary

Purchasing Power Erosion Over Time

Frequently Asked Questions

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