Infation HSC Notes

Consumer price Index (CPI): summarises the movement in the prices of a basket of goods and services according to their significance for the average Australian household Used to measure inflation in Australia. (NOTE: does not include ALL goods and services but covers a wide selection, hence good indication of overall movement in priced on consumer goods which reflects the changes in the cost of living). Inflation: sustained increase in the GENERAL level of prices in an economy Headline Inflation: the rate of inflation calculated by the CPI can be misleading as it included prices which are volatile or one-off factors.

Underlying Inflation (core inflation): removes the effects of on-off or volatile price movements, hence it tends to be less variable than headline inflation. Trimmed Mean: inflation determined by calculating the average inflation rate after excluding the 15% of items with the largest price increases and the 15% of items with the smallest price increases (or largest falls) from CPI Weighted median: is inflation calculated by comparing the inflation rate of every item in the CPI, and identifying the middle observation. (Half of items will be greater than this weighted median, while the other half will be less than it).

Structural Change: refers to the process by which the pattern of production in an economy is altered over time, and certain products, processes of production, and even industries disappear while others emerge. Productivity: refers to the quantity of goods and services the economy can produce with a given amount of inputs such as capital and labour. Demand-Pull Inflation: occurs when AD or As is growing while the economy is still nearing its supply capacity, so that higher demand leads to higher process rather than more output.

Cost-Pull Inflation: occurs when there is an increase in production costs that producers pass on in the form of higher prices this raising the rate of inflation. Nominal Wage: is the pay received by employees in dollar terms for their contribution to the production process, not adjusted for inflation. Stagflation: occurs when the rate of inflation and the rate of unemployment rise simultaneously International competitiveness: refers to the ability of an economy's exports to compete on global markets. An economy may be competitive by selling products of a higher quality or a lower price than competitors.

Microeconomic Reform Policies: are polices that are aimed at individual industries, seeking to improve the efficiency and productivity of producers – also referred to as supply-side policies. Labour Market Polices: are microeconomic polices that are aimed at influence in the operation and outcomes in the labour market including industrial relations polices that regulate the process of wage determination as well as training, education and job-placement programs to assist the unemployed. Recent Trends in Inflation The most significant microeconomic achievement in the Australian economy of recent times is the sustained inflation rate.

After two decades of high inflation levels, the Australian economy lowered its inflation rate and kept it down, and was able to sustain the lowest rate since the 1960s. In 2993 the RBA started to target an inflation rate of 2-3%, this target was formalised in 2996. Generally the inflation rate has stayed in this target range. It did go above the range in 2000 due to introduction of the GST which caused a one off increase in the headline inflation. Between 1996 and 2009 both the headline and underlying inflation rate has averaged 2. 6%. The high inflation rate of the 1970s and the 1980s was only stopped by the recession of the early 1990s.

Australia emerged from this recession with historically low inflation rates, and soon after the RBA started to target monetary policy to sustain 2-3% inflation. Whenever there have been inflationary pressures the RBA has been able to tighten interest to slow down the growth in demand and restrain any inflationary pressures. Other global factors that contributed to this low inflation level, was increased completion, lower global inflation. Despite the economic growth of the 1990s and the 2000s the inflation pressured were constrained as monetary policy was effective.

Some economists suggest that the sustained rate of inflation was due to the structural changes during the 1980s and 1990s. Microeconomic reform increased the intensity of domestic and foreign completion. Also the productivity growth in the 1990s contributed to restrained inflation. Hence these factors made it possible for Australia to experience strong economic growth, falling cyclical unemployment and low inflation.

Between 2005 and 2008, the inflationary pressures were the strongest, as underlying inflation peaked at 4. 7% due to both the higher global prices (for food, energy etc.) and the strength of economic activity, as the Australia economy was close to full capacity, productivity costs (labour, materials and transport) were rising and these all contributed to higher consumer prices. The onset of the global financial recession in 2008 reduced the inflationary pressures. The slower economic growth and incomes growth reduced the ability of businesses to increase consumer prices, while lower demand for labour and materials reduced pressures on business costs. By the 2009, the underlying and headline inflation are returned back into the RBA's target range.