Will your Christmas shopping drive up inflation?

With the Black Friday sales not long behind us and Christmas shopping underway – not to mention the looming Boxing Day sales – this time of year sees a significant uplift in consumer spending. But does this contribute to inflation and a likely interest rate rise?

Getting the facts on spending and inflation

I recently saw some commentary in the local community media where someone was accusing shoppers of being reckless and excessive with their sales shopping, and that it would only result in another interest rate rise. The comment quickly gained many replies and whilst it became quite a heated conversation centred around defending shopping in the sales, no one really challenged whether Christmas spending would lead to increased inflation and a subsequent interest rate rise. So does it? The short answer is not necessarily.

Inflation and seasonal adjustments

Every quarter, the ABS calculates the price changes of each item from the previous quarter and aggregates them to work out the inflation rate for the entire Consumer Price Index (CPI basket).

However there is a lever known as ‘seasonal adjustment’ which can be applied. Seasonal adjustment is designed to even out movements, such as price increases or decreases, related to a specific season or event. This means economists (and the RBA!) can look at the underlying base trend of inflation, rather than just a seasonal spike.

If we’re shopping sales, then could inflation actually decrease?

By definition, inflation calculates the price changes from quarter to quarter. You may naturally wonder then, if everyone is shopping the sales at discounted prices, could this mean inflation figures will actually be lower in the next quarterly figures? While that seems logical, the CPI basket has a broad range of consumer items – the ABS collects prices for thousands of items, which are grouped into 87 categories (or expenditure classes) and 11 groups. So in effect, the sales we see over Black Friday, Christmas and Boxing Day, may only cover a small number of these categories. And again, with seasonal adjustment, the impact of these temporary sale discounts would be factored in.

So I’m free to shop the sales?

Whilst spending volume will increase over the Christmas and New Year period, it’s really the underlying price trend that the RBA will be looking at. And it’s important to remember that, although the movement in prices over time is the most common driver of inflation, there are various other factors that can impact inflation too. Shopping the sales will always be an effective way of paying less for the things we need or want to buy, but if we shop mindfully and within our means, they’re unlikely to contribute to a future interest rate rise.

If you have any questions on this topic or any aspect of financial planning, please feel free to contact us and we can have an obligation-free chat.