If inflation is falling, why aren’t my expenses?

The latest monthly figures show inflation in Australia has fallen from 7.4% to 6.8%, but that's still a significant rise. What does it mean?
australia inflation rate february 2023

Inflation has fallen in Australia for the second month in a row according to the latest figures.

The Australia inflation rate for February 2023 was 6.8%. That means prices increased 6.8% from February 2022 to February 2023, compared to results of 7.4% in January and 8.4% in December.

Inflation can fluctuate a lot from month to month so no definitive conclusions can be drawn. However, the second consecutive result of lower inflation could mean the Reserve Bank of Australia is less likely to raise interest rates again next week.

So, are prices are falling?

No. While it is a positive sign that inflation has fallen, the numbers show prices are rising at a slower rate, not that prices are falling.

What is inflation?

Inflation is a single number which summarises how a variety of different prices have changed.

Yesterday’s figure is measured compared to a year ago – so prices were 6.8% higher this February than they were last February.

As long as inflation remains a positive number (which it currently is), a ‘fall’ in inflation just means prices aren’t going up by as much as they were. It doesn’t mean prices are actually ‘falling’.

Why care if prices haven’t fallen?

The news that prices are still rising may not sound very exciting, even if they are rising more slowly.

However, it may be a sign things are returning to ‘normal’.

The Reserve Bank of Australia wants inflation to get back to 2-3% a year and has promised to keep increasing interest rates to ensure this happens.

Lower inflation means fewer rate rises are likely to be needed.

Do prices ever fall?

Negative inflation (or deflation), where prices do actually fall across the board, is uncommon and usually considered undesirable.

When people expect prices to fall, they’re less likely to want to spend today (because they think they’ll be able to pay less tomorrow). This can be associated with bad economic outcomes.

The RBA, like many central banks, considers inflation around 2-3% to be a healthy middle ground.

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