The Relationship Between Inflation and Interest Rates

If you’ve had your finger on the pulse of the finance industry recently, you’ve probably heard frequently about rising inflation and interest rates. While investors and economists are fluent in finance lingo, these terms can confuse everyday Australians. To most of us, high inflation and interest rates simply mean our day-to-day living is becoming more expensive.

However, inflation and interest rates serve very different purposes. Inflation measures a change in the cost of goods and services, while interest rates exist as a countermeasure to help reduce inflation.

What is Inflation?

Inflation is a measurement used to track the rising cost of goods and services in a country. For example, you purchased a litre of milk for $1.55. Today, you go to the store and buy a litre of milk from the same brand for $1.60. Inflation for that milk would be 3.2%.

When inflation is high, it typically means people are paying more for their everyday goods and services, and regulatory bodies take notice. When prices are down, this is called deflation.

What is Interest?

While inflation extends to all purchases, interest is applied to debts and savings. If you open a bank account with a deposit of $40,000 at 5% interest per annum, you will earn $2000 in interest over the year.

On the other hand, if you have a home loan at 5% interest and your monthly principal repayment is $3,000, you will pay $150 in interest per month.

Rising interest rates are typically signs of high inflation, as interest is an effective way to combat inflation. Higher interest rates affect how much people looking for loans can borrow, reducing the activity in the market. This means fewer people borrow less money, and the economy can stabilise.

With interest rates remaining high, the hope is that inflation will begin to reduce. For reference, The Reserve Bank of Australia (RBA) raised its cash rate in November 2023; inflation was at 5%. A higher cash rate typically means higher interest rates from the banks.

While consumer spending is a key driver of inflation, it’s not the only one. Environmental factors regularly affect significant shifts in inflation. The COVID-19 pandemic greatly impacted the economy, and some experts equate today’s inflation to high government spending during the pandemic and high consumer spending as lockdowns ended.

Inflation is currently declining, and the cash rate is anticipated to follow suit, possibly early next year. However, we can’t say for certain. Inflation could always go back up, meaning high interest rates need to be implemented for a while longer.

If you have any questions regarding inflation or interest rates or just want to discuss your financial goals, reach out! I’m always keen for a chat.

What Clients Are Saying About Us

      EXCELLENT  
   Based on 175 reviews 
    
 
 
 
   
 
 
       Posted on Google  
   
   rita lee 
 
 
 
 Trustindex verifies that the original source of the review is Google. We had Shaz who was professional, managed our anxiety, and we were so happy with the results and full approval. Found us a very competitive interest despite the complexities with our case. 10/10 experience.
  
 
      Posted on Google  
   
   Nyange Ngandu Simbi 
 
 
 
 Trustindex verifies that the original source of the review is Google. Many thanks Rob for helping me out, you are just excellent broker. Many thanks.
Theodor
  
 
      Posted on Google  
   
   Anshika Thakur 
 
 
 
 Trustindex verifies that the original source of the review is Google. Honestly, so glad I went with Shaz and Sahil at Strawberry Finance. They were always there whenever I had questions and made sure I understood everything properly. The whole process was much easier than I expected. Thanks heaps, guys, really appreciate all the help!
  
 
      Posted on Google  
   
   Sam Key 
 
 
 
 Trustindex verifies that the original source of the review is Google. I would highly recommend Shaz at strawberry finance.
This is our second time with Strawberry Finance and get got approved in 2 days!

The entire experience was easy and stress free.
Shaz was able to secure a much better rate than previously on and was able to save us alot of money!!
  
 
      Posted on Google  
   
   Hayley Hall 
 
 
 
 Trustindex verifies that the original source of the review is Google. We recently had a particularly complex matter, and the team at Strawberry Finance were fantastic to deal with. They were on top of everything, always approachable, responsive and happy to help, which made a real difference. We genuinely appreciate their support and always enjoy working with the team at Strawberry Finance. Highly recommend
  
 
      Posted on Google  
   
   Sai Phone Myint Oo 
 
 
 
 Trustindex verifies that the original source of the review is Google. As a first home buyer, I’m very grateful for the support I received from Shaz. He has been extremely helpful, professional, and very quick to respond to any questions I had throughout the process.

I would highly recommend Shaz, Sahil and Strawberry Finance Team to anyone looking for a reliable and supportive mortgage broker.
  
 
      Posted on Google  
   
   Kash .. 
 
 
 
 Trustindex verifies that the original source of the review is Google. We had a great experience with Sahil, Shaz and Nitin at Strawberry Finance. Sahil was professional and approachable, Shaz was extremely helpful and responsive, and Nitin was also great throughout the process. The whole team made everything smooth and easy to understand and genuinely cared about helping us. Highly recommend Strawberry Finance for anyone looking for a reliable mortgage broker.
  
 
      Posted on Google  
   
   Kate White 
 
 
 
 Trustindex verifies that the original source of the review is Google. We had the best experience working with Sahil and Shaz and I cannot recommend them enough. So reliable, great communication and genuinely went above and beyond for us throughout the entire process.

Nothing ever felt like too much trouble, they were always quick to answer our questions and kept us updated every step of the way.

We felt completely looked after from start to finish and wouldn’t hesitate to work with them again. If you’re looking for brokers who genuinely care about getting the best outcome for you, these are your guys. Thank you so much!
  
 
      Posted on Google  
   
   Deng Aban 
 
 
 
 Trustindex verifies that the original source of the review is Google. Shaz and Sahil made the whole process feel way less stressful than I expected. They were prompt, straightforward, and just got things done. No fluff, no chasing. Felt like I was actually being looked after rather than just processed.
  
 
  
  
 
    Verified by Trustindex  Trustindex verified that these reviews were published on Strawberry Finance - Mortgage Broker Perth's Google Business Profile. Learn more