How concerned should we be about rising inflation?

There is so much talk of rates and inflation right now, but as with most topics in finance, the discussion turns complex and leaves most people scratching their heads. 

So what does it all mean? Why should you care? Let’s break it down…

Higher inflation is here

First, a few definitions.

Inflation is a general increase in prices of a basket of selected goods and services. It serves as an indicator of the change in “purchasing power” of a currency over time (i.e. what your money can buy).

The Consumer Price Index (CPI) is the most widely used measure of inflation. Most central banks around the world aim for an increase of 2% in prices per year. That way, consumers don’t notice the changes in prices too much. If it’s higher than the target range for a sustained period of time, it can cause serious economic problems.  

Why? Prices are rising but incomes are not. So consumers cannot afford the same amount of goods or services they could before. 

The latest inflation data shows prices rose 0.8% in September alone, and 3% year-on-year (yoy).

The effects can be easily felt when you make a daily purchase, such as buying yourself a cup of coffee in the morning. Today, you should expect to pay up to $1 more for a daily cuppa.

Not only coffee, but we are also seeing price climbs across a “basket” of goods and services such as transportation (up 3.2%), childcare (up 9.9%). Food and fuel prices (7.1%) also go up a lot.

And it’s not just an Australian phenomenon. 

Major economies around the world are also suffering from price rises caused by inflationary pressures. The past week saw inflation increases in the UK (4.2% yoy) and Canada (4.5% yoy) and US (6.2% yoy). 

What is causing inflation to rise?

There are a few root causes for this. The first cause is the disruption to global supply chains due to the pandemic, resulting in steep rises in freight and shipping costs. 

Secondly, businesses are dealing with labour shortages. Employers are in a mad scramble for extra hands while workers are walking away from jobs, demanding better pay and flexible working arrangements.  

Thirdly, just when it has become difficult to transport goods and production has slowed, demand has shot up making things more expensive. The surge in demand is so powerful that supply is struggling to keep up. 

This surging demand is thanks, in