What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) and how it impacts the property market in Australia

The Consumer Price Index (CPI) in Australia is an economic indicator that measures the average change in the consumer prices over a period of time.

The Australian Bureau of Statistics (ABS) releases the CPI every quarter, helping investors like us understand the inflationary trends that dictate interest rates, rental trends and most importantly, consumer sentiment.

While many will gloss over CPI announcements in the paper, it’s a relatively simple term to unpack. And by understanding its impact on the Australia economy and property market, your investment nous will go far further.

How does CPI affect the Australian economy?

The CPI can been seen as a measure of inflation. When CPI rises, it shows us that the level of prices have increased, usually leading to a rise in the cost of living.

The Reserve Bank of Australia (RBA) closely monitors CPI as part of its monetary policy decisions, namely its interest rate announcements every month and whether or not they’ll hike, drop or leave rates the same. It all depends on where the inflation rate is in relation to the RBA’s inflation target (usually between 2 per cent and 3 per cent).

When inflation is high, the RBA might increase interest rates to curb spending and stabilise the economy. Conversely, low inflation might lead to lower interest rates to push Aussies to buy and invest.

But as we’ve seen in recent years, this tool is not a smoking gun and it can take other measures (and external factors) to bring inflation under control.

Why is the Consumer Price Index important for property investors?

Understanding CPI is crucial for property investors to understand because it influences several key aspects of the real estate market:

• Interest rates: As we’ve shared, CPI impacts the RBA’s decisions on the nation’s cash rate. Higher inflation typically leads to higher interest rates, which can affect mortgage costs and borrowing capacity (and vice versa).
• Property prices: Inflationary pressures reflected in the CPI can lead to property price growth. As the cost of building materials and labor rises, so too does the cost of constructing new properties, driving up market prices.
• Rental yields: As the cost of living increases, so do rental prices. Investors need to stay informed about CPI trends to adjust their rental to relevant rates and ensure they maintain a healthy yield.
• Consumer sentiment: Human behaviour is easily influenced, and with headlines of high inflation and high interest rates, buyers are often seen sitting on their hands until better news comes.
• Real vs nominal value of mortgages: Did you know inflation can benefit borrowers? As long as borrowers’ incomes rise in line with inflation, they’ll have increased repayment power with regard to their debt. That’s because their original debt (whether mortgage or commercial loan) keeps the same real value over time, while incomes generally increase.

Components of CPI

The CPI takes into account a range of goods and services. These can include:

• Housing: One of the most important components of CPI, the housing category includes the cost of home purchase, rent, maintenance and utilities.
• Food and non-alcoholic beverages: Think prices of groceries and other essential food items.
• Transportation: These include the costs associated with buying vehicles and purchasing fuel, and the cost public transportation.
• Health: Covering medical expenses, pharmaceuticals and health insurance.
• Education: Reflecting changes in school fees, higher education costs and other educational expenses.

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So, as you can see, keeping a close watch on CPI trends and understanding their impact will help you make more informed investment decisions. And from our experience, staying informed is one of the smartest investments you’ll make, to increase your returns and secure a relevant real estate asset at a timely stage of the property cycle.

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