Why Australia's Inflation Rate is Not the Full Story

We hear about it constantly in the news: soaring prices, cost of living pressures, and the all-important inflation figure that guides the Reserve Bank's decisions on interest rates. Most of us think we know what inflation is—it's the reason our money doesn't stretch as far as it used to.

But what if the official inflation figure has fundamental flaws? What if it doesn't accurately reflect the true cost of living for millions of Australians?

This guide will uncover what's really behind those inflation numbers, reveal what's left out, and explain what it means for you and your finances.

How is inflation measured in Australia?

Inflation happens when the prices of the goods and services we buy go up over time, causing our money to lose its purchasing power.

In Australia, the main tool used to measure inflation is the Consumer Price Index (CPI). The Australian Bureau of Statistics (ABS) creates a "basket" of goods and services that most households spend money on, divided into 11 weighted categories, including:

• Food and non-alcoholic drinks
• Alcohol and tobacco
• Housing
• Transport
• Health
• Education
• Insurance and financial services

Housing has the biggest weight because it's a large part of most budgets, while a category like communication has a smaller weight. The ABS publishes this data quarterly and also provides a monthly CPI indicator that is less comprehensive. This CPI figure is then used by the RBA to guide interest rate decisions, by the government for policy and welfare adjustments, and by businesses for pricing and wage negotiations.

What major costs does the Australian CPI leave out?

On the surface, the CPI seems robust. But when you look closer, you find that some of the biggest costs facing Australians are either misrepresented or left out entirely.

The True Cost of Housing

Housing makes up around 22% of the CPI basket, the largest single category. It includes things like rent, utilities, and maintenance. As the ABS explains, it also includes "new dwelling purchases." This is where it gets misleading.

• It doesn't include existing homes. About 69% of all properties sold in Australia in 2024 were existing dwellings. If you bought an established home, your purchase is not included in the CPI. The "new" in "new dwelling" literally means newly constructed homes with no prior sales history.
• It excludes the cost of land. Even if you buy a newly built home, the CPI only captures the increase in construction costs (materials, labour, etc.). It completely excludes the value of the land the house sits on, which is often the biggest driver of property price increases.
• It excludes mortgage repayments. Roughly 37% of Australians own their home with a mortgage. The skyrocketing mortgage repayments that have squeezed household budgets in recent years are not reflected in the official inflation figures.

If you are a homeowner with a mortgage, a recent buyer, or someone trying to enter the market, a huge part of your financial reality is simply missing from the statistics.

Regional Australia: A Third of the Population Ignored

Did you know that the CPI only measures price changes in Australia's eight capital cities? According to the ABS, 33% of Australians live outside these cities, in regional, rural, or remote areas.

This means that the inflation experience of a third of our population is completely left out of the headline CPI figure. Regional areas have different cost dynamics. Transport costs are often higher due to longer supply chains, and limited access to services like healthcare creates unique financial pressures that are not captured in the national data used to set interest rates and government policy.

How Government Policies Can Distort the Inflation Figure

The headline CPI figure can also be artificially lowered by temporary government policies. If the government provides a subsidy or rebate for an item with a significant weight in the CPI basket, it can pull the overall inflation figure down.

A perfect example is the energy bill rebates offered by federal and state governments in 2024 and 2025. These rebates caused electricity prices to fall significantly in official CPI reports. However, the Treasury itself noted that without these rebates, electricity prices would have continued to rise.

While these measures provide welcome cost-of-living relief, the concern is that they mask the underlying causes of inflation. When the rebates end on the 30th of June 2025, we are likely to see a rebound in the inflation figures.

What inflation figure does the RBA actually use?

While the media focuses on the headline CPI, the Reserve Bank of Australia places a greater emphasis on "trimmed mean" inflation.

This figure is calculated by "trimming" away the items with the largest price changes (both positive and negative) to get a clearer view of the underlying inflation trend. It reduces the effect of irregular or temporary price changes, like the energy rebates.

The RBA has stated that this underlying inflation figure is more likely to reflect the future course of inflation. Before they consider cutting interest rates, the board needs to be confident that this underlying inflation is sustainably moving back towards the 2-3% target range.