The Inflation Rate is an increase in prices of goods and services. When inflation rises, prices go up and the value of money goes down; every dollar you own buys you a smaller percentage of goods and services. This is what is called ‘purchasing power’.
The value of money decreases over time as inflation rises. For example: if in 1985 you had $75,200, this amount would buy you the average Melbourne house. However, in today’s market conditions, the same amount would only equate to the value of a 10% deposit of an average Melbourne house, which is roughly about $900,000.
Inflation Rate is measured by the Consumer Price Index and this is the most commonly used measure followed by investors. The CPI is defined as the cost of a number of goods and services representative of the economy put together on what is called “market basket”. The cost of the market basket is compared over time and expressed as the annual percentage change.
There are three different causes for Inflation explained in simple terms:
Demand pull inflation - the increasing demand for goods and services which pushes the prices up. In Melbourne and Sydney – two of our major property markets – population growth (demand) from overseas and interstate migrants has had a significant influence on house prices due to limited supply of housing.
Cost Push inflation - the increasing production costs of goods and services. The increase in productions costs can include increases in taxes, wages and natural resources or materials used for construction. Companies have to maintain profit margins and the increase in production costs is passed on to the end consumer at a higher price to compensate for those increasing costs.
Monetary inflation - an oversupply of money in the economy which results in the value of money going down, pushing prices up and creating inflation.