What is the Consumer Price Index (CPI)?
Inflation is an increase in the general level of prices of the goods and services that households buy, measured as the rate at which those prices change over time. Prices usually rise, but they can also fall — a situation called deflation. The most widely watched measure of inflation in Australia is the Consumer Price Index, or CPI, which tracks the percentage change in the price of a representative basket of goods and services consumed by households.
The CPI is calculated by the Australian Bureau of Statistics (ABS) and published once a quarter. To build it, the ABS collects prices for thousands of individual items, grouped into 87 expenditure classes and 11 broad groups. Each quarter it measures how the price of each item has moved since the previous quarter, then aggregates those movements to produce a single inflation rate for the whole basket.
How the basket is weighted
Not every item in the basket carries the same influence. The ABS weights each one according to how much households actually spend on it, drawing on detailed survey data about where household income goes. The more of their income households direct toward a particular item, the larger that item's weight in the index — so movements in housing, food and transport move the headline number far more than movements in a minor category. The basket itself is reviewed and updated as spending patterns shift; smartphones, for example, were added to reflect the way households took up new technology. Because the underlying household spending data is only refreshed roughly every five years, the composition of the basket changes slowly even as the prices within it move every quarter.
Why the CPI matters for borrowers
The CPI is not an abstract statistic. It is one of the key figures the Reserve Bank of Australia watches when it sets the cash rate, which in turn flows through to the interest rates on home loans, investment loans and SMSF lending. When measured inflation runs higher than the RBA's target band, the policy response tends to be tighter monetary settings and higher rates; when it eases, there is room for the opposite. Over the long run, you will see a gradual increase in the cost of goods and services, and wages and salaries generally rise alongside it — which is part of why a fixed loan balance becomes a smaller share of your income as the years pass.
That relationship is the real reason inflation belongs in a borrowing conversation. The question is never simply whether rates might move; it is how a loan should be structured so that a shift in the rate cycle does not destabilise the plan — fixed versus variable, the size of the buffer, and the order in which you take on debt. That is structural work, and it is best mapped against your full position rather than a forecast.
Book a strategy session and we will work through where the rate cycle leaves your borrowing.
General information only — not personal financial product or credit advice. AeFin is an Australian Credit Representative (CR 464548) of Finsure (ACL 384704).