Inflation and the Cost of Living

A significant concern for many households is the expense they incur to buy the goods and services that are necessary to maintain a certain standard of living – that is, their ‘cost of living’. The prices of many of these items tend to rise over time, which places upward pressure on the cost of living. The CPI, which measures inflation in prices, is often used to assess changes in the cost of living. Over the past decade, the CPI has increased by around 30 per cent, averaging around 23⁄4 per cent per year. This pace of increase has been consistent with the Reserve Bank’s target of keeping CPI inflation between 2 and 3 per cent per year, on average, over the business cycle. This rate of inflation has also been low compared with that in the two decades prior to the Reserve Bank’s adoption of an inflation target (in 1993), when CPI inflation averaged nearly 10 per cent a year (Graph 1).