GDP, inflation and your finances  

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Team MONEYME|23 May 2024| 2-minute read

When GDP increases, so does inflation. The growth of both is necessary to ensure that a nation’s economy remains strong. However, when GDP rises too quickly, inflation can get out of control, creating significant financial stress for individuals and businesses.  

Defining GDP and inflation in plain English 

GDP stands for gross domestic product. This term refers to the market value, in dollar terms, of a nation’s total goods and services produced.   

In contrast, inflation measures the average increase in prices of a nation’s goods and services, usually over a year.  

How do GDP and inflation interact? 

The relationship between GDP and inflation is complex; however, an increase in GDP often coincides with an increase in inflation. This is because a bigger GDP indicates a growing economy, with low unemployment and higher wages, which, in turn, increases household incomes. This creates greater demand for goods and services, and, if demand grows more quickly than supply, then goods and services become more expensive. Many people experience a decrease in purchasing power, which can lead to a widespread erosion in living standards.  

In contrast, slow, steady growth in GDP, accompanied by slow, steady growth in inflation (at around 2-3% per year), is good for the economy. It indicates that the providers of goods and services are making decent profits, enabling them to create jobs and pay better wages. This improves the standard of living for everyone.  

What does inflation mean for you and your finances? 

The Reserve Bank of Australia increased the cash rate thirteen times from May 2022, in an attempt to return inflation to a target of 2-3%. Consequently, many Australians felt an increase in cost-of-living pressures, caused by both high inflation and rising interest rates.  

The good news is, inflation began to fall in early 2023, decreasing to 3.6% in early 2024. When inflation falls, your money starts to go further. If you’re in debt, this could be a good time to focus on paying it down – starting with overdue accounts and more expensive debt.   

If you have multiple loans, credit cards and buy-now-pay-later accounts, you could consider debt consolidation. This means rolling all your debts into one. You’ll then have a single, monthly repayment deadline to meet – instead of multiple deadlines with multiple terms and conditions. In addition, you might benefit from a lower interest rate. Debt consolidation can make managing your finances much easier.  

Light at the end of the tunnel 

Australia’s inflation rate isn’t quite below 3% yet, but it’s certainly a relief that it’s dropped – following 18 months of continual increases in prices. It’s an opportunity to recalibrate your finances, particularly if getting on top of your debts is a priority.