How inflation affects your retirement income

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%.

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.