Key Insights
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.
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.
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.
What Is Consumer Price Index?
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.
Current Consumer Price Index Australia.
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.
Market Sentiment
Higher CPI and the associated increase in interest rates can dampen market sentiment, sometimes leading to a cooling in housing markets. This could be both a challenge and an opportunity for first home buyers, depending on the market dynamics.
Government Policies and Subsidies
In response to rising inflation and housing costs, governments may introduce subsidies, grants, or policy changes to support first home buyers. Awareness of such measures and how they relate to CPI movements can be beneficial.
Fixed vs. Variable Rates
Those with or considering a variable-rate mortgage will be directly affected by interest rate changes due to CPI movements. Fixed-rate mortgages provide temporary protection against such changes, but when the fixed term ends, the prevailing interest rates will apply.
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.
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.
Download the ‘Causes of Inflation’ Explainer PDF courtesy of the RBA.
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.
Glossary of Terms Used In This Article:
Inflation & Deflation
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but deflation increases it. This allows more goods and services to be bought than before with the same amount of currency.- Wikipedia
Causes of inflation
The main causes of inflation can be grouped into three broad categories:
- demand-pull,
- cost-push, and
- inflation expectations.
As their names suggest, ‘demand-pull inflation’ is caused by developments on the demand side of the economy, while ‘cost-push inflation’ is caused by the effect of higher input costs on the supply side of the economy.
Inflation can also result from ‘inflation expectations’ – that is, what households and businesses think will happen to prices in the future can influence actual prices in the future.
These different causes of inflation are considered by the Reserve Bank when it analyses and forecasts inflation” Resources Explainers Causes of Inflation, 2024
Anything else you’re unsure of? Call our friendly team, we’d be happy to explain.