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Consumer Price Index – What it is and how it impacts you

Consumer Price Index – What it is and how it impacts you

Key Insights

  • Cost of Living: As the Consumer Price Index (CPI) fluctuates, so do daily expenses, affecting first home buyers’ capacity to save for a home deposit and manage ongoing mortgage commitments. Understanding these shifts is crucial for effective budgeting and financial planning.
  • The CPI and inflation rates go hand in hand. Elevated inflation levels could result in heightened mortgage expenses, affecting the borrowing capacity and monthly repayment obligations of first home buyers.
  • Housing Affordability: The CPI’s influence extends to housing costs, shaping rents and property prices. Rising CPI levels contribute to increased housing expenses, presenting challenges for first home buyers attempting to enter the property market. Monitoring CPI trends is pivotal for navigating the evolving landscape of housing affordability.

 

The Consumer Price Index (CPI) is an economic indicator that plays a significant role in shaping the financial landscape of the country. For first home buyers, understanding the CPI is essential as it directly influences the cost of living, inflation rates, and ultimately, the affordability of purchasing a home.

The Consumer Price Index is a like a thermometer that measures the weighted average of prices for a basket of everyday delights – from your morning coffee to the roof over your head. Crafted to mirror shifts in the cost of living over time, the CPI provides a snapshot of economic health, presented as an index number with the base year at 100. The Australian Bureau of Statistics (ABS) is responsible for calculating and regularly updating the CPI.

 

What happens if the Consumer Price Index (CPI) spikes or drops?

When the CPI is on the rise it means that consumer prices are also rising, and when it takes dip consumer prices are generally falling. A higher CPI indicates higher inflation, while a falling CPI indicates lower inflation, or even deflation. To reduce inflation the government may increase interest rates to try balance the inflation rate.

 

Impact on First Home Buyers

Cost of Living and Budgeting

As the CPI goes up and down, so do your everyday expenses.  For first home buyers, a rise in the CPI means increased prices for goods and services, impacting their ability to save for a home deposit and manage potential ongoing mortgage repayments.

Inflation and Interest Rates

The CPI is closely linked to inflation rates. Higher inflation can lead to an increase in interest rates set by the Reserve Bank of Australia (RBA) to control inflation. For first home buyers, higher interest rates mean more expensive mortgages, potentially affecting their borrowing capacity and monthly repayments.

Housing affordability

The CPI has a specific impact on housing costs, including rents and property prices. An increase in the CPI can contribute to rising housing costs, making it more challenging for first home buyers to enter the property market. Monitoring CPI trends is crucial for understanding the evolving landscape of housing affordability.

Wage adjustments

Employers and the government may use the CPI to adjust wages and benefits to account for the changes to the cost of living.

 

In essence, the Consumer Price Index is more than just a statistical measure; it is a dynamic force that ripples through various aspects of our financial lives. For first home buyers, staying informed about CPI trends is not merely an academic exercise but a practical necessity for navigating the ever-changing terrain of economic conditions and making informed decisions about their financial future.