Inflation

Question 1

The Goal of Low Inflation / Price Stability

Answer 1

The goal of low inflation (price stability) is a sustained increase in the general level of prices of between 2 to 3% on average.

Question 2

Why is the goal of inflation not 0%?

Answer 2

The goal is not 0%, because if inflation was this low, consumers might delay their purchases if they expect prices to rise very slowly, or even fall. When consumers delay purchasing, production slows down along with economic growth, and thus reduces employment too.

Question 3

Demand Pull Inflation

Answer 3

This is when excess or high levels of aggregate demand cause shortages to occur and thus prices to rise.

Question 4

Cost Push Inflation

Answer 4

This is when costs of production rise, and producers and businesses raise their prices of G+S to cover the higher costs of production.

Question 5

Disinflation

Answer 5

A decrease in the rate of inflation, meaning that prices are increasing at a slower rate.

(decreasing rate)

Question 6

Deflation

Answer 6

A decrease in the general price level of goods and services, meaning that prices on average are falling.

(negative rate)

Question 7

Consumer Price Index (CPI)

Answer 7

This is the most reliable measurement of consumer price inflation.

This is calculated by the ABS who collect 100,000 prices of 1,000 goods and services purchased by households - (basket). Each of these goods are categorised into groups, which are then weighted to reflect their relative importance to the typical Australian household.

Question 8

Headline Inflation

Answer 8

This is the inflation rate calculated by the price movements of ALL goods and services contained in the CPI.

Question 9

Underlying Inflation

Answer 9

Underlying inflation rates exclude various prices of the CPI in an attempt to remove the impact of irregular or temporary price changes that otherwise would provide misleading information on inflation pressures and the trajectory of inflation.

Question 10

Trimmed Mean
Weighted Median

Answer 10

The trimmed mean is the most commonly used underlying measure of and starts with the headline CPI before removing the 15% of items whose prices increased the most and least (or decreased). –> Trimmed mean is the average price changes of the middle 70% G+S.

The Weighted Median uses the price change that sits in the middle of the range (50th percentile) so that the large price increases/decreases don’t affect this measure of inflation. –> Weighted Mean: Change in the price of the median item.

Question 11

Inflation Rate Formula

Answer 11

Annual IR = CPI(June 2023) - CPI(June 2022) / CPI (June 2022)