In this guide
For the past few years, inflation and the high cost of living have been front of mind for many Australians. From rising prices at the supermarket checkout to higher mortgage repayments, the impact of inflation is part of our daily lives.
Less obvious is the insidious way inflation can eat away at your long-term retirement income.
While inflation has been moderating locally and globally, it’s refusing to go quietly.
Stubborn inflation
As you can see in the graph below, Australian inflation was relatively benign for close to 15 years, lulling consumers and investors into thinking low inflation and even lower interest rates were the new norm. Until they weren’t.
Inflation spiked to 7.8% in late 2022, leading the Reserve Bank of Australia (RBA) to aggressively lift interest rates to get it back within its target range of 2–3%.
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Inflation and interest rates
When inflation is too high, the RBA lifts its official cash rate, which increases borrowing costs for banks. Banks generally pass on these higher costs by increasing their interest rates on mortgages and other loans.
As people and businesses have bigger repayments on their loans, they have less money to spend on other things. This reduces demand for goods and services as people tighten their belts, economic activity slows down and inflation falls. Or so the theory goes.
After 13 rate increases between May 2022 and November 2023, inflation fell back within the RBA’s target band, which allowed it to cut rates three times in 2025 and more were tipped to follow. But then inflation reared its ugly head again, rising to 3.8% in the year to October 2025. The RBA responded by holding the cash rate at 3.6%, where it is expected to remain in 2026, with some economists even tipping a rate hike.
Now that the term inflation is front of mind once again, it’s worth looking at what it is, how it is measured, and what it means for retirement incomes.
What is inflation?
Simply put, inflation is the increase in the prices of goods and services across the economy. When prices go up, you need more money to buy the same things.
The key measure of inflation in Australia is the Consumer Price Index (CPI), which measures the percentage change in the price of a ‘basket’ of goods and services consumed by capital-city households. Historically, the CPI has been calculated and released on a quarterly basis by the Australian Bureau of Statistics (ABS), but since November 2025, it’s also being reported monthly to give policymakers more timely information.
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The basket includes thousands of consumable items in 11 categories of goods and services shown below, from food and drink to petrol, housing, health, education and childcare.
Source: Australian Bureau of Statistics
Inflation is an important concept to understand because it can reduce your purchasing power if your income, both while you are working and in retirement, stays the same while prices go up.
Why inflation matters in retirement
Once you retire, high inflation reduces the future value of the income you receive from your super and other investments, which makes it more difficult to achieve or maintain your planned standard of living. It’s also likely to increase the amount of time you spend worrying about your finances, or lack thereof.
Even though all households are affected by rising inflation, wage increases can help offset the rising cost of living when you’re working. But once you retire and start living off your finite savings, inflation eats away at your purchasing power and there’s not a lot you can do about it.
This is especially the case for retiree households on a full or part Age Pension. While the Age Pension is indexed for inflation twice annually, there’s a time lag. (More on this later).
Pensioners also tend to spend a higher proportion of their income on non-discretionary items such as food, housing (including rent, mortgage repayments and rates) and power bills, which have faced some of the biggest price rises in recent years.
As you can see in the graph below, in the year to September 2025, age pensioners (and government benefits recipients generally) faced the steepest annual increase in prices of 3.9%, well above inflation of 3.2% for the same period. The main contributors were housing, food, alcohol and tobacco.
By comparison, self-funded retirees faced a lower annual increase in prices of 2.8%, well below inflation, while employees had the lowest increase of 2.6%. Self-funded retirees tend to spend a bigger proportion of their income on discretionary spending such as recreation and culture, which includes local and overseas travel, another major contributor to inflation in 2025.
3 ways inflation affects your retirement savings
1. Inflation erodes the value of your money
Over time, rising inflation silently erodes your buying power. As the value of your assets slowly goes down in retirement, the cost of the goods and services you need to buy to maintain your standard of living goes up.
Say you retired in 2010 with the healthy lump sum of $500,000. A basket of goods and services valued at $500,000 in 2010 would have cost you $721,514 to buy in 2024.
That’s a 44.3% rise in costs over 14 years due to the average annual inflation rate of 2.7% over that period, according to figures from the RBA’s inflation calculator. This means every dollar you spend today buys considerably less than it did a decade and a half ago.
If the current average annual inflation rate of 2.7% over the past 14 years persists over the next 14 years, your $5 coffee today will cost $7.43 in 2039. The horror!
Another way to see the impact of inflation in retirement is to see how many years your lump sum will last, given different inflation rates.
Say you retire today with a lump sum of $750,000 and intend to withdraw an annual income of $55,000, which is close to the Association of Superannuation Funds of Australia (ASFA)’s comfortable standard of living (see super tip below).
Given a conservative 5% average annual return on your investments, the table below shows the impact of various levels of inflation and when your money is likely to run out if you gradually increase your annual payments in line with inflation to preserve your spending power. Everyone’s actual numbers will be different, but this table illustrates the general principle.
| Low inflation rate | Medium inflation rate | High inflation rate | |
|---|---|---|---|
| Annual inflation rate | 1% | 3.5% | 7% |
| Lump sum at retirement | $750,000 | $750,000 | $750,000 |
| Annual income drawn down in retirement | $55,000 | $55,000 | $55,000 |
| Return on investments | 5% per year | 5% per year | 5% per year |
| Years to lump sum being exhausted | 20 | 16 | 13 |
Source: Author using Noel Whittaker’s retirement drawdown calculator
2. Government benefits generally don’t keep pace
As mentioned earlier, the Age Pension and allowance rates are indexed in September and March each year to help retiree incomes keep pace with rises in living costs. Indexation of the Age Pension rate is linked to movements in prices and wages, while allowance rates are linked to the CPI only.
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Although this sounds good, many observers believe twice-yearly cost-of-living adjustments don’t fully compensate retirees for the impact of the rising cost of living.
As many retirees have found out in recent years, Age Pension increases lag any rise in prices, as fortnightly payments only increase after the ABS has declared the inflation rate for the two preceding quarters.
This can create difficulties for retirees struggling to pay higher bills with the same level of fortnightly pension. As the living cost index graph above shows, inflation affects retiree households (self-funded retirees and age pensioners) differently from other households and from each other. As age pensioners generally spend a higher proportion of their income on non-discretionary items, they are the most sensitive to inflation.
3. Inflation can make real returns negative
For example, if you invest in a term deposit paying 4% and the annual inflation rate is averaging 3%, your real investment return is effectively 1%. If inflation jumps to 4%, your real return is zero despite the nominal return of 4%. If inflation rises above 4%, your savings will be eroding, not increasing.
Returns from shares and property generally outpace inflation in the long run, but these investments come with more short-term risk. Government bonds are traditionally regarded as low risk, and governments will generally lift the interest rate on bond issues in response to inflation, but this comes with a fall in existing bond prices. Inflation-linked bonds, as the name suggests, adjust returns for inflation.
While inflation is only one of many investment risks to consider, retirees should always keep inflation in mind when determining their asset allocation.
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Despite market risk, experts generally advise retirees to include a significant allocation to growth assets such as shares and property to ensure their savings last the distance.
Watch for inflation in retirement forecasts
Nearly all large super funds offer calculators for estimating your future retirement balance and income. But forecasts from calculators should always be treated with caution, as they are not crystal balls. They are only as good as the various assumptions they make about the future – particularly when it comes to inflation.
The Australian Securities and Investments Commission (ASIC) publishes an estimated rise in the cost of living on an annual basis and super funds are required to use this inflation assumption in their online calculators.
While this makes it easier for you to compare income forecasts from different funds, you may wish to alter the assumptions of the calculators you use to reflect your own views on inflation and other variables.
If your super fund chooses not to use ASIC’s annual inflation estimate, it must clearly disclose this to you. It must also explain the implications of the inflation rate the fund has chosen to use in its place.
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