Why inflation is one to watch in 2023

Why inflation is important

For many of us, inflation is something we only notice when it moves quickly. Commonly associated with the ‘cost of living’, its pace of increase this year has fast made it a headline issue for households.

However, for policy makers – especially the Reserve Bank of Australia (RBA) – inflation is always in focus. It is a crucial factor for the direction of cash rate changes and an important barometer for the health of the economy.

That’s why understanding what’s happening with inflation is important in your planning for the new year. Its impact extends beyond the cost of household goods and goes to the heart of your personal finances in 2023.

How inflation impacted you in 2022

Broadly speaking, inflation refers to the increase in the prices of goods and services that households buy¹. The Consumer Price Index, or CPI, is one of the better-known measures of inflation, because it tracks changes to prices in important categories such as housing, transport, healthcare and clothing.

In 2022, Australians experienced the sharpest annual rise in the CPI since the 1990s². Data for the 12 months to October shows housing rose by 10.5%, food and non-alcoholic beverages by 8.9% and transport by 7.4%.³

The story was different from city to city in the 12 months to the September 2022 quarter. Hobart experienced the highest percentage increase at 8.6%, while Perth experienced the lowest increase at 6.0%.⁴

Rising interest rates are another consequence of inflation. In a bid to curb inflation, the RBA has lifted the cash rate from its record lows at a pace not seen in Australia since the 1990s.

The cash rate is an important lever for the RBA when inflation is high. There are various factors that can trigger inflation, but broadly speaking, it’s an issue of supply and demand. For example, when the demand for goods and services outpaces the supply of those goods and services, it puts upward pressure on prices. Lifting the cash rate is one way to trigger reduced household spending, and cool demand.

What’s next for inflation?

Forecasting has been a difficult ask in recent years, as unforeseen shocks reverberated on the global stage. However, it is expected that inflation will remain relatively high into 2023.

“In terms of the outlook for inflation, and when we can expect some reprieve from inflation, it’s certainly a 2023 story,” says Justin Fabo, Senior Australian Economist at Macquarie Group.

“It’s not really until the middle to latter part of next year that we’re expecting inflation to come down materially.”

At this stage, the RBA also suggests⁵ it will take a couple of years before inflation comes back down to its target of 2-3%.

Three pointers for the new year

This environment can put a strain on your finances, making it all the more important to ensure your daily habits are helping – not hindering – your goals. Pratham Karkal, Head of Personal Banking Direct at Macquarie’s Banking and Financial Services Group, shares three pointers to consider in 2023.

1. Know your finances

“There are a number of different tools that can help you understand your net financial position. When you know your financial position, you know your options.” 

2. Be prepared

“In this environment, you might want to structure your finances more effectively, or you might want to take advantage of the higher cash rate environment. A banking specialist can help you with understanding your options, so you can make wiser decisions and ensure your money is working as hard as you are.”

Find out more: A guide to managing your finances in 2023

3. Always think for the long-term

“When you think about your long-term goals, think ‘what if’. What if my expenses go up, interest rates go up, or my circumstances change? Are my banking products flexible enough to support that, are its features designed for the long run?”

Key takeaways

• Rising inflation impacts your household costs and impacts the RBA’s decisions on the cash rate, making it a key consideration for your personal finances.
• Inflation is set to remain relatively high as we move into 2023, though we may see its pace of growth slow.
• It’s important to ensure you’re using the tools and strategies at your disposal in this environment, to ensure your habits are helping – not hindering – your savings plans.