Rising inflation? It just got personal

Price pressures are making headlines right now with the latest ABS data showing inflation is sitting at 6.1%[1].

That said, not that many of us need to be told the Consumer Price Index (CPI) is rising. A quick trip to the supermarket confirms everyday purchases are becoming more expensive.

High inflation is something we haven’t had to deal with in Australia for many years. As the graph below shows, inflation actually dipped below zero in mid-2020, meaning prices fell rather than rose. And in the 10 years pre-pandemic, inflation only nudged 3% once back in mid-2014.

Rapidly rising inflation is not unique to Australia.  In fact, to date we have got off reasonably lightly compared to some other developed nations. The UK is seeing inflation hit 10.1%, the highest since 1990[2]. In the US, inflation is at 8.5%[3].

A whole variety of factors is driving up living costs, but I suspect most consumers are more interested in how they can manage rising prices rather than the reasons behind them.

The thing is, inflation isn’t something we simply have to sit back and wear. It is possible to reduce your personal rate of inflation.

What does your typical basket of goods look like?

Inflation in Australia is measured by movements in the CPI. In simple terms, the index looks at how prices have changed across various categories of household spending as shown the table below.  

What’s interesting is that the CPI rose 6.1% over the year to June 2022. But not every household would have seen their costs rise by 6.1%. Some would have experienced a higher increase in costs, and others would have seen costs rise by less.  

That’s because not all households spend in the same way.

Here’s an example. Transport costs jumped 13.1% over the year to June. That’s been a shocker for a colleague of mine who lives in a regional area poorly served by public transport. She drives at least 60 kilometres daily, and that means transport is one of her biggest expenses.  So her personal rate of inflation could be higher than 6.1% as rising transport costs are having a bigger impact on her budget.

Conversely, a family that doesn’t drive much, or doesn’t own a car, can find higher fuel costs have had little impact on their budget. So their personal rate of inflation could be below 6.1%.

The point is, by taking a look through the basket of goods and services on which the CPI is based, it can be possible to identify areas of spending that take up a big chunk of your spending. From there, it’s a matter of focusing cutbacks on those areas to minimise the impact of inflation.

How to trim your personal rate of inflation

As a guide, food and drink prices are up 5.9%. However, plenty of households got into the swing of growing backyard veggies during COVID. This can help to cut spending on fresh greens at the supermarket. That matters because we know the big supermarkets are typically able to pass higher costs straight onto the consumer. 

Housing costs are up 9%, and if you are a renter I admit there may be no silver bullet to save. Rental vacancies are wafer thin right now, so cutting costs isn’t always as easy as moving to a cheaper property.

However, if you’re a homeowner with a mortgage it really is important to check the rate you’re paying on your loan. It is still possible to score a home loan costing close to 3% particularly if you refinance to a new lender. CommBank’s new digital arm – Unloan, for instance, is offering a rate of 3.14% to refinancers. Making the move to a lower rate loan could bring down your housing coasts, and thereby trim your personal inflation rate.

A 6.3% annual rise in the cost of furnishings and home products can be cut back by postponing big ticket purchases for the home – at least until inflation dials down a notch or two. Or follow the lead of seven out of ten Australian shoppers who say they are waiting to take advantage of the sale season that kicks off with Black Friday on 25 November. 

The main point is to understand the areas of your spending that are likely to cop the biggest inflationary hit. Then use this to focus on areas to trim back. I understand that some families are thinly stretched financially at present, and there’s not much fat left to cut from household budgets. But by identifying those areas of spending where costs have risen the most, you could potentially save more compared to making cutbacks where prices have barely moved at all such as communications, clothing and health.