The value of a dollar isn’t what it used to be—literally. In 2025, with global markets in flux and inflation still a hot topic, Australians are paying closer attention to what their money can actually buy at home and overseas. Enter Relative Purchasing Power Parity (RPPP)—a concept that’s both a mouthful and a meaningful tool for understanding exchange rates, inflation, and your financial reality when travelling, investing, or shopping online.
What Is Relative Purchasing Power Parity?
Relative Purchasing Power Parity is an economic theory that predicts how exchange rates will adjust over time to reflect differences in price inflation between countries. Unlike its ‘absolute’ counterpart—which assumes identical goods should cost the same everywhere (ignoring all real-world frictions)—RPPP acknowledges that prices change at different rates in different countries. As a result, currencies should adjust to maintain purchasing power parity over time, but not necessarily at any single moment.
- If Australia’s inflation is higher than the US, RPPP predicts the AUD should depreciate against the USD to offset the difference.
- If Japan’s inflation is lower than Australia’s, the yen should strengthen relative to the dollar.
RPPP isn’t just an academic exercise—it’s used by analysts, policymakers, and businesses to forecast currency movements and assess whether a currency is over- or undervalued.
Why RPPP Matters for Australians in 2025
2025 has seen continued volatility in global prices, with inflation rates settling down from their pandemic-era highs but remaining uneven between countries. In Australia, the latest RBA forecasts put inflation at around 3.2%, while the US hovers closer to 2.6%. RPPP suggests the AUD should, in theory, weaken slightly against the USD over the year—unless other factors intervene.
This matters for:
- Overseas travel: If the Aussie dollar buys less abroad, your Bali getaway or US shopping spree could cost more.
- Import costs: A weaker AUD makes imported electronics, cars, and even groceries pricier.
- Investment returns: Currency shifts impact international shares, superannuation funds, and property investments.
With the Reserve Bank and the Treasury watching global inflationary trends closely, RPPP remains a central benchmark for understanding how Australia’s currency might move—especially as trade and supply chains continue to adapt post-pandemic.
2025 Trends: RPPP in Action
This year has brought a few notable developments that put RPPP front and centre:
- Asia-Pacific inflation divergence: Australia’s inflation is tracking higher than Japan’s and South Korea’s. As RPPP would predict, the AUD has slipped against the yen and the won, making Japanese holidays and Korean imports dearer for Australians.
- Tech and energy prices: Global demand for lithium and rare earths—key Australian exports—has kept the AUD surprisingly resilient, even as inflation differences persist. This shows that RPPP is a guide, not a guarantee, with commodity cycles and investor sentiment also influencing rates.
- Online shopping shifts: With more Australians buying from overseas websites, fluctuations in the AUD directly affect the cost of everything from gadgets to clothing. RPPP helps explain why your $100 in 2023 might only stretch to $95 worth of US goods in 2025.
Keep in mind that central banks, geopolitical tensions, and unexpected shocks (think supply chain disruptions or rapid policy changes) can cause currencies to deviate from what RPPP would predict—sometimes for months or even years at a stretch.
Real-World Example: The AUD-USD Exchange Rate
Suppose Australia’s inflation rate is 3.2% and the US is at 2.6%. If the AUD-USD rate was 0.70 at the start of 2025, RPPP would suggest the AUD should depreciate by roughly the difference in inflation rates (0.6%), making the new rate closer to 0.6958 by year-end, all else being equal. In reality, the AUD-USD rate might move more or less, depending on interest rates, trade balances, and market sentiment—but RPPP remains a useful baseline for expectations.
Bottom Line: Why Watch RPPP?
Relative Purchasing Power Parity isn’t perfect, but it’s a practical tool for Aussies navigating a world of shifting prices, exchange rates, and global uncertainty. Whether you’re planning your next holiday, managing a business’s import costs, or investing abroad, understanding RPPP can help you make smarter, more informed financial decisions in 2025 and beyond.
