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The September quarter Consumer Price Index (CPI) was released last week.

This index measures movements of prices in key categories of consumer spending on a quarterly and annual basis. The September 2021 CPI rose 0.8% for the quarter and 3.0% year-on-year (YOY).

Because of the 3.0% YOY increase, media commentators are raising alarm bells about increases in the official interest rate, even though the Reserve Bank has indicated that this is unlikely before 2024. Rapidly increasing prices can be difficult for those no longer earning an income.

Is it all bad news?

Not necessarily.

Firstly, the impetus behind these increased prices, to an extent, is the ending of lockdowns in the most populous state of NSW. Now Victoria is emerging with a noticeable jump in consumption the first weekend post lockdown, evidenced by hair and beauty services up an incredible 2000+%.

For the hundreds of thousands of Australians who experienced extended lockdown, coming out is a joy. The chance to hug grandchildren, have a hit of tennis, enjoy a pub meal and travel further than five kilometres is wonderful. Even a haircut is a major event when you’ve gone without for 12 weeks.

Of course there will be pent up demand for many goods and services and this is evident in the end September CPI. It may well be seen again in January when the December 2021 quarter is reported.

Whether you are significantly affected by such price rises depends upon two things; the categories in which prices went up and your retirement income status. If you are a self-funded retiree and enjoy long road trips, then an increase in fuel prices will affect your expenditure more than that of a full Age Pensioner who does not own a car.

The upside of price increases, of course, is the effect that they have on Age Pension rates.

Remember that these rates are reviewed and revised twice a year, March 20 and September 20. Last year was the first year since 1997 that they did not increase. As you are aware, they did increase on September 20 this year. And should prices continue to climb, this will mean another pension rate increase on March 20, 2022, to compensate for these price rises.

How does the CPI affect the rate of the Age Pension?

Age Pension rates are increased in line with a rise in Consumer Price Index (CPI) or the Pensioner and Beneficiary Living Cost Index (PBLCI), whichever is greater. Pensions are then benchmarked against a percentage of the Male Total Average Weekly Earnings (MTAWE).

Knowing how much you spend and whether it is covered by your income is key to your peace of mind. If you have concerns that your household costs are no  longer adequately covered, you might like to check out our spending guide to ensure your income is sustainable.