When inflation is on the rise, consumers are the ones that feel the pinch. But what exactly is inflation and how does it impact the cost of living?

Inflation is an increase in prices for general goods and services. When inflation is high, consumer purchasing power is reduced, meaning people can buy less than before for the same amount of money.

The Reserve Bank of Australia (RBA) responds to high inflation by increasing the cash rate; this is the interest rate on unsecured loans between banks. Banks generally pass this increase onto their customers, whose loan repayments increase, meaning they have less money to spend on other things.

The aim of the RBA is to reduce the demand for goods and services: this slows down economic activity, which in turn slows inflation.

While slowing inflation is a good thing, this method of doing it can take some time to work. And in the meantime, the cost of living gets worse as people balance the combination of higher repayments and less money for goods and services which already cost more than before.

Are you feeling the squeeze from inflation?

Now could be a good time to review your budget and assess whether your home loan, credit card, or savings accounts are still suitable for you. You may want to consider refinancing, a balance transfer to a card with an interest free term, or a savings account that pays higher interest.

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Information in this article is general in nature and does not take into account your objectives, financial situation or needs. You should consider the appropriateness of this information and refer to the relevant Terms and Conditions or Product Disclosure Statement before acquiring a product.

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