Inflation decides how far your pay goes and where interest rates head next. Here’s what the number means, and how Australia measures it.
Inflation is the general rise in prices over time.
When inflation is 3 per cent a year, a basket of goods and services that cost $100 last year costs about $103 today. Prices don’t all rise at the same speed. Some, such as electricity or insurance, can jump sharply while others, such as electronics, can fall. Inflation measures the overall change.
A little inflation is considered normal and healthy in a growing economy. Problems start when it runs too high, because wages and savings lose value, or when prices fall across the board, which can make people and businesses delay spending.
In Australia, inflation is measured by the Australian Bureau of Statistics using the Consumer Price Index, or CPI. The CPI tracks the prices of a large basket of goods and services that households buy, from groceries and rent to petrol, health care and holidays, weighted by how much households spend on each.
Since late 2025, the ABS has published a complete CPI every month, and the monthly figure is now the main measure of headline inflation. A quarterly CPI is still published for those who need it, as an average of three monthly results.
Headline, underlying and why the RBA cares
The headline inflation rate includes everything in the basket, which means it can be pushed around by big one-off moves, such as a spike in petrol prices or a government rebate on power bills.
To see the trend underneath, economists look at underlying inflation. The measure the Reserve Bank watches most closely is the “trimmed mean”, which removes the items with the biggest price rises and falls each period and averages the rest.
That matters because inflation is the Reserve Bank’s main target. Its job is to keep inflation between 2 and 3 per cent over time. If inflation runs above that range, the RBA is more likely to raise the cash rate to cool spending. If it falls back, it has room to cut.
That’s why each CPI release can move markets and the Australian dollar, and why economists pore over which prices are driving the result. Rising rents, insurance and services prices tend to worry the Reserve Bank more than a temporary jump in fuel, because they are harder to bring down.
For households, the key comparison is between inflation and wages. When pay rises faster than prices, living standards improve. When prices outpace pay, that’s what’s often called a cost-of-living squeeze.
