At its simplest, inflation describes how quickly prices are changing across the economy. It doesn’t track individual bills or household budgets, but a broad picture of price movements over time.
In Australia, inflation is measured using the consumer price index (CPI). Understanding how CPI works is key to understanding why inflation can sometimes feel disconnected from everyday experience.
How inflation is measured in Australia
Inflation is measured through the CPI, which tracks price changes across a basket of goods and services that households spend money on.
CommBank economist Harry Ottley explains that CPI “takes a basket of goods and services that Australians spend their money on” and then “and then weights it by how much money we spend on each item in the basket”.
Items people spend more on — such as food, rent and transport — have a larger influence on the final number. Items people spend less on have a smaller impact.
The result is a single figure showing how prices across that basket have changed over a given period of time.
What CPI is designed to show
CPI is designed to capture broad trends in prices, not individual experiences.
It tells us things like:
- how fast prices are rising across the economy
- whether price growth is speeding up or slowing down
- where pressure is building across major spending categories
It’s a tool for understanding economy-wide trends, rather than a measure of personal cost-of-living pressur
What CPI doesn’t include
One detail that often surprises people is what CPI leaves out.
Ottley notes that CPI “doesn’t include mortgage costs, for example”. That means changes in mortgage repayments caused by interest rate movements don’t show up directly in the inflation figure.
Housing is included in CPI through the cost of building a new home, and so is rent, but the cost of servicing a mortgage is not.
That distinction matters during periods of rising interest rates, when mortgage holders can feel significant pressure that isn’t reflected in headline inflation numbers.
Why inflation easing doesn’t mean prices fall
Another common source of confusion is the expectation that prices will return to previous levels once inflation slows.
Inflation measures how fast prices are rising — the rate of change. It doesn’t measure where prices sit — the level.
After several years of sharp price increases, Ottley says “the price level has changed a lot”. Even if price growth slows, prices are rising from a much higher base.
One of the main goals of the Reserve Bank of Asutralia (RBA) is to bring inflation (the rate of change) back to into its target zone. It’s not to get prices to fall back to an arbitrary level. That would be deflation and is very bad for the economy.
