Money Illusion in Australia: Understanding Real vs Nominal Gains in 2025

Ever felt wealthier after a pay rise, only to find your morning coffee or rent now costs more too? You’re not alone—and you might be falling for the money illusion.

In 2025, with inflation and wage growth back in the headlines, understanding the money illusion is more important than ever for Australians who want to make smarter financial decisions. This subtle cognitive bias fools us into thinking we’re better off just because we see bigger numbers in our bank accounts, even when our real purchasing power hasn’t changed—or has even gone backwards.

What Is the Money Illusion?

The money illusion is our tendency to focus on the face value of money—nominal amounts—without considering changes in its real value due to inflation. In simple terms, it’s mistaking a bigger number on your pay slip or savings account for actual wealth, ignoring how much less that money might buy today compared to last year.

• Example: If your salary rises from $80,000 to $84,000 (a 5% increase), but inflation is running at 6%, your real income has actually decreased.
• Classic scenario: Rental agreements are renewed with a nominal increase, but if inflation is higher, landlords (and tenants) may both misjudge their gains or losses.

In 2025, with the Australian Consumer Price Index (CPI) projected to hover around 4.2% and wage growth averaging just 3.8%, many households are experiencing the effects of money illusion firsthand.

How the Money Illusion Shapes Australian Financial Decisions

Australians are not immune to this bias—especially when inflation is subtle but persistent. The illusion can affect everything from wage negotiations and superannuation planning to property purchases and investment returns.

• Pay Negotiations: Workers may accept a 3% wage increase, believing they’re ahead, even if inflation is at 4%—a real pay cut.
• Property Market: In Sydney and Melbourne, median house prices have climbed nominally since 2020. But after adjusting for inflation, real gains are far more modest.
• Superannuation: Many focus on nominal growth in their super balances, without factoring in inflation or changes to the Age Pension test thresholds (which in 2025 have been indexed to the CPI).

Recent research from the Reserve Bank of Australia suggests that even financially literate individuals can underestimate the impact of inflation when making long-term plans, especially during periods of rapid price changes like those seen post-pandemic.

2025 Policy Changes and Money Illusion Traps

This year has brought several policy tweaks that make understanding the money illusion even more crucial:

• Stage 3 Tax Cuts: Coming into effect July 2025, these cuts will boost take-home pay for many Australians. However, bracket creep and higher living costs mean the real benefit may be less than it appears at first glance.
• Minimum Wage Adjustments: The Fair Work Commission’s 2025 increase to the minimum wage is 4%, in line with projected inflation. For minimum wage earners, this means no real gain, even as their pay packet grows nominally.
• Centrelink Payments: Indexed increases to payments like JobSeeker and the Age Pension aim to preserve purchasing power, but if inflation outpaces indexation, recipients could still lose ground in real terms.

Households relying on fixed incomes or government payments are especially vulnerable to the money illusion, as their spending power can erode quietly over time.

How to Outsmart the Money Illusion in Everyday Life

Beating the money illusion starts with awareness—and a few smart habits:

1. Track Real, Not Just Nominal, Growth: Always compare pay rises, investment returns, or property gains to inflation rates. The ABS publishes quarterly CPI updates you can use as a benchmark.
2. Adjust Your Budget Annually: Factor inflation into your household budget. If your groceries or utilities are up 5%, but your income is up 3%, you may need to trim spending or negotiate harder for a bigger raise.
3. Question Big Numbers: When a bank, employer, or politician touts a big increase, ask: “How much is that worth after inflation?”
4. Plan for the Long Term: For goals like retirement, use real (inflation-adjusted) returns when projecting how much you’ll need or how fast your savings will grow.

By focusing on real value, not just nominal numbers, you’ll avoid costly mistakes and make decisions that genuinely improve your financial wellbeing.

Conclusion: Stay Savvy, Stay Ahead

The money illusion can quietly erode your financial gains—unless you keep your eye on the real value of every dollar. In 2025, with inflation and wage growth in flux, Australians who see through the illusion will be best placed to negotiate, invest, and plan for a more secure future.