inflation causes, effects and trends💸📈 Flashcards
current inflation rate
4.1%
inflation definition
The sustained increase in prices of goods and services over time.
How is inflation measured
Measured by monitoring the process of selected baskets of G&S
11 regimens ( food, clothing + footwear )
Consumer Price Index ( CPI ):
Weighted index numbers are used to convert the price movements of a wide range of common metropolitan household spending into a measure of the rate of inflation.
Rate of Inflation (%):
Current Year’s CPI - Prior Year’s CPI / Prior Year’s CPI x 100
- uses headline inflation
ABS released every quarter
headline inflation defintion
Raw inflation figure as reported through the CPI without removing ‘ volatile ‘ price movement.
negative of CPI
- Regular concerns about the baskets contents
- Calculated quarterly
- Exclusion of FOP + raw materials
- Lagging indicator of spending pattern changes
- Variations in household incomes and tastes
- Its metropolitan focus
core / underlying inflation definition
Inflation that is measured by taking the CPI outcome and then excluding volatile and other items such as government changes.
Trimmed mean inflation
Concentrates on the long term trends in inflation
demand pull inflation
Demand pull inflation occurs when AD rises faster than AS ( productive capacity ).
Causes of inflation
D - demand pull
I - Imported inflation
C - Cost Push
E - expectations of inflation
quantatuve easing
cost push inflation
defintion: caused by increases in the cost of the factors of production for firms
explain cost push inflation
In order to maintain profit margins, firms pass these higher costs on to consumers in the form of higher prices
imported inflation definition
Caused by increases in the prices of tradable products imported into Australia ( and are part of the CPI )
Caused by:
By price rises for those goods in exporting countries
Depreciation of AUD
inflationary expectations households
Households expect price rise → increase spending to maximise value of money
DEMAND PULL INFLATION
workers inflationary expectations
Workers expect inflation → push for higher wages → raises wage costs for firms
COST PUSH INFLATION
quantitative easing
If govt increases money supply when level of goods remains static in economy, then only achieve increase in prices.
Causes of Higher Inflation in Australia:
- High wages and non-wage benefits ( minimum wage )
- Depreciation of the Australian dollar ( from 2013 )
- Higher food prices from natural disasters ( HEADLINE INFLATION )
- Supply constraints and strong demand ( shipping + delivery costs )
- Government intervention ( tariffs + taxes )
- Higher oil prices
depreciation of AUD + inflation
STAT: US1.1 to US0.67
- Raises prices of imports as they become more expensive when converted into AUD
55% of imports are intermediate goods
Might add to cost-push inflation rather than itemised directly in CPI
Supply Constraints
- Little excess capacity in economy ( e.g labour, UE falling due to eg )
- As a result, AS rises more slowly than AD and consumer competition pulls up prices
- Eventually, the economy cannot produce any more output driving up prices even more quickly
Higher protection:
higher tariffs force up the price of imports, raising imported inflation in Australia.
government charges / taxes
Increases in government charges increase inflation.
2000 introduction of GST → spike in CPI to 6%
Carbon tax add 0.75% to inflation figure
Ukraine supply of wheat
Prior to war, Ukraine accounted for 10% of world wheat market, 15% of corn, 13% barley, 50% sunflower oil
Ukraine crippled by war, fall in output of food has serious consequences for global food security and food prices
negative effects of inflation firms - increased production costs
May be passed on to consumers in form of higher prices but must be absorbed by the firm, reducing profit margins ( price elasticity of demand )
russia supply of natural gas
2021- Russia was world’s largest producer god natural gas + largest exporter
Increase in gas prices
Firms - Loss of int competitievness
Firms in other countries may not face high prices impacting on exporting and impact-competing firms.
firms - loss of profitability + market share
May discourage investment and limit the long term ability of firms to increase productive capacity
households - loss of real wages
Will erode purchasing power → fewer g+s → lower SOL
households - impact on C and S
Household expenditure as a proportion of income must rise due to higher prices → increased C and decreased S
Inflation erodes real interest rate and acts as a disincentive to S
households - redistribution of Y
Away from earners ( who can’t secure higher wages ) to those who earn dividends and profits
govt - weaker fiscal position
Welfare payments ( indexed to inflation ) will rise
Governments need to spend more on existing infrastructure projects
However, wages will rise → higher tax revenue ( bracket creep )
inflation effect on EG
Inflation constraints EG, limiting long term consumption and investment reducing the economy’s ability to sustain eco growth.
- Govt implement contractionary macroeconomic policies to dampen growth to mediate inflation
external stability + inflation
Inflation harms external stability → loss of int competitiveness → worsens CAD ( exports fall, imports rise )
inflation + aud value
AUD may depreciate as foreign investment and demand for aus exports fall
positive effect - on real interest rates
Inflation helps borrowers with loans at fixed interest rates.
Inflation rises, real interest rate falls, pay less interest
positive effect - on asset prices
Asset prices may rise → increasing wealth effect as investors seek higher returning assets to beat the higher inflation figure
rationale for inflation
- Stimulates wage growth pressures
- Growth in wages improves consumer confidence, stimulating AD
- Inflation better than deflation
- Price movements allows for more efficient determination of relative prices
- Signal that economy is performing strongly
- Real value of debt decreases over time
