3. Economic issues - Inflation (Price Stability) Flashcards
Inflation is…
a SUSTAINED increase in the general level of prices, over time.
Optimum inflation
between 2 and 3% to achieve the goal of price stability
CPI stands for
Consumer price index
The CPI measures…
CPI measures the changes in prices in a selected number of consumer goods and services over time.
Formula for measuring inflation
(later CPI - Earlier CPI) / earlier cpi x100
Headline inflation rate is…
The quarterly change in CPI
The CPI contains weightings for…
Housing / Food and non alcoholic beverages / recreation / Transport / furnishing / alcohol and tobacco / health…
Underlying inflation rate…
removes “one-off” / seasonal / volatile factors
Examples include higher food prices due to cyclones / floods/ droughts
Inflation rate trends
during re sources boom (2006-08) - 4.3%
After GFC - 1.5%
During june quarter of covid-19 : -1.9%
Causes of inflation
growth in aggregate demand - Demand pull
Aggregate supply restricted or decreased - cost push
Common causes of cost push inflation
Common causes of cost-push inflation are wage increases, higher costs of raw materials or other increases in inputs.
Effect of inflation on consumers
loss of purchasing power and real income
Effect of inflation on Workers
decline in real incomes
Effect of inflation on producers
will react by putting up prices
Effect of inflation on exporters
decrease due to a decline in international competitiveness
Effect of inflation on savers
If interest rates do not keep up with inflation, the real value of savings will decrease
Effect of inflation on Investors
the higher cost of borrowing will reduce the demand for loans
Effect of inflation on government
cost of providing goods and services will rise
If inflation targets are not met
- Fall in purchasing power ; Redistribution of income to those receiving profits and dividends ; A loss in international competitiveness ; A reduction in savings and investment ; If inflation is caused by wage increases, a rise in unemployment ; A worsening of government budget
Positive of inflation
Asset prices rise, which increases the wealth of asset owners
POLICIES TO REDUCE INFLATION
- Contractionary monetary policy
- Contractionary fiscal policy
MICROECONOMIC REFORM to prevent inflation
- Competition policy: promotion of increased competition can reduce prices.
- Tariff reform, including the removal/reduction of tariffs, can help lower prices
- Removal of indirect taxes
- Increasing the efficiency of PTEs to lower prices
- Introducing enterprise bargaining to link wage growth with productivity growth
