A Guide to Managing CPI & Cost of Living Increases

You are likely aware that Australia is currently grappling with a significant cost of living challenge that affects just about everyone to some degree. As the cost of essential goods and services continues to surge, many Australians are feeling the strain on their wallets. So what can be done about it? Here, we’ll look at why these increased cost of living pressures are here, the role of the Consumer Price Index (CPI) and interest rates, and explore strategies individuals can adopt to effectively manage these escalating costs.

The Cost of Living Challenge

The cost of living in Australia has been on an upward trajectory for several years, and it’s a multifaceted issue that impacts individuals and families from all walks of life. Factors such as increased housing costs, energy bills, education expenses, healthcare costs, and even everyday grocery bills have combined to create a financial burden that many find difficult to manage. Add to that successive interest rate hikes since May 2022, and just about everyone across the country is impacted by prevailing cost of living pressures.

Understanding CPI and its Impact

The Consumer Price Index (CPI) is a key economic indicator that measures the average change in prices paid by consumers for a basket of goods and services over time. It provides valuable insights into the overall inflation rate, which directly affects the cost of living. When the CPI rises, it means that, on average, the prices of goods and services have increased. This can lead to a reduction in purchasing power, as the same amount of money buys fewer goods than before.

Interest rates play a crucial role in this equation. The Reserve Bank of Australia (RBA) uses interest rates as a tool to manage inflation. When inflation is rising too quickly, the RBA might increase interest rates to cool down spending and investment (as we have seen in the past 12+ months), which in turn can help lower inflation. Conversely, when the economy is sluggish, the RBA may decrease interest rates to encourage spending and borrowing, stimulating economic activity. When interest rates rise, the cost of borrowing increases, affecting mortgages, personal loans, and credit card debt. This can strain household budgets and put added pressure on families already trying to deal with the rising cost of living.

How to Manage the Rising Cost of Living

While the challenges are significant, there are strategies individuals and families can adopt to manage the rising cost of living:

1. Budgeting: Creating a comprehensive budget that outlines income and expenses is essential. It helps identify areas where spending can be trimmed and highlights opportunities for savings. This includes cutting discretionary spending. Review discretionary spending on non-essential items like dining out, entertainment, and luxury purchases and cut back where you can.
2. Reduce your Costs: Researching and comparing prices before making purchases, especially for big-ticket items, can result in substantial savings over time. Around the house, see what you can do with regards to energy efficiency. Implement energy-saving practices such as using energy-efficient appliances, sealing drafts, and being mindful of electricity and water usage – this will lead to lower utility bills and more money in your pocket.
3. Smart Debt Management: If carrying debt, consider refinancing options or consolidating high-interest debts into a more manageable payment plan.
4. Investing in Yourself: Investing in education and skills development can lead to better job opportunities and potentially higher income over the long term.
5. Building an Emergency Fund: Having an emergency fund can provide a financial buffer during unexpected expenses, reducing the need to rely on credit. You may recall our article on that in a previous newsletter).
6. Consider Downsizing: If housing costs are a major concern, evaluating the possibility of downsizing or exploring more affordable housing options can significantly reduce expenses.

What Now?

The rising cost of living in Australia is a complex issue that requires careful consideration and strategic planning on an individual level. But there’s no reason you should have to tackle this all on your own – now more than ever it is so critical to have an experienced financial adviser in your corner. Your own management of income and expenses will account for most of the legwork, but the additional strategies and financial opportunities afforded to you by maintaining an ongoing advice relationship can be what makes the difference between just scraping by, and growing your wealth.

To see what the Priority team can do for you, please contact us on 02 9415 1611 or via our website.