inflation causes, effects and trends💸📈

Question 1

current inflation rate

Answer 1

4.1%

Question 2

inflation definition

Answer 2

The sustained increase in prices of goods and services over time.

Question 3

How is inflation measured

Answer 3

Measured by monitoring the process of selected baskets of G&S
11 regimens ( food, clothing + footwear )

Question 4

Consumer Price Index ( CPI ):

Answer 4

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.

Question 5

Rate of Inflation (%):

Answer 5

Current Year’s CPI - Prior Year’s CPI / Prior Year’s CPI x 100
- uses headline inflation
ABS released every quarter

Question 6

headline inflation defintion

Answer 6

Raw inflation figure as reported through the CPI without removing ‘ volatile ‘ price movement.

Question 7

negative of CPI

Answer 7

• 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

Question 9

core / underlying inflation definition

Answer 9

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

Question 10

demand pull inflation

Answer 10

Demand pull inflation occurs when AD rises faster than AS ( productive capacity ).

Question 11

Causes of inflation

Answer 11

D - demand pull
I - Imported inflation
C - Cost Push
E - expectations of inflation
quantatuve easing

Question 12

cost push inflation

Answer 12

defintion: caused by increases in the cost of the factors of production for firms

Question 13

explain cost push inflation

Answer 13

In order to maintain profit margins, firms pass these higher costs on to consumers in the form of higher prices

Question 14

imported inflation definition

Answer 14

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

Question 15

inflationary expectations households

Answer 15

Households expect price rise → increase spending to maximise value of money
DEMAND PULL INFLATION

Question 16

workers inflationary expectations

Answer 16

Workers expect inflation → push for higher wages → raises wage costs for firms
COST PUSH INFLATION

Question 17

quantitative easing

Answer 17

If govt increases money supply when level of goods remains static in economy, then only achieve increase in prices.

Question 18

Causes of Higher Inflation in Australia:

Answer 18

• 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

Question 19

depreciation of AUD + inflation

Answer 19

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

Question 20

Supply Constraints

Answer 20

• 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

Question 21

Higher protection:

Answer 21

higher tariffs force up the price of imports, raising imported inflation in Australia.

Question 22

government charges / taxes

Answer 22

Increases in government charges increase inflation.
2000 introduction of GST → spike in CPI to 6%
Carbon tax add 0.75% to inflation figure

Question 23

Ukraine supply of wheat

Answer 23

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

Question 24

negative effects of inflation firms - increased production costs

Answer 24

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 )

Question 25

russia supply of natural gas

Answer 25

2021- Russia was world’s largest producer god natural gas + largest exporter
Increase in gas prices

Question 26

Firms - Loss of int competitievness

Answer 26

Firms in other countries may not face high prices impacting on exporting and impact-competing firms.

Question 27

firms - loss of profitability + market share

Answer 27

May discourage investment and limit the long term ability of firms to increase productive capacity

Question 28

households - loss of real wages

Answer 28

Will erode purchasing power → fewer g+s → lower SOL

Question 29

households - impact on C and S

Answer 29

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

Question 30

households - redistribution of Y

Answer 30

Away from earners ( who can’t secure higher wages ) to those who earn dividends and profits

Question 31

govt - weaker fiscal position

Answer 31

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 )

Question 32

inflation effect on EG

Answer 32

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

Question 33

external stability + inflation

Answer 33

Inflation harms external stability → loss of int competitiveness → worsens CAD ( exports fall, imports rise )

Question 33

inflation + aud value

Answer 33

AUD may depreciate as foreign investment and demand for aus exports fall

Question 34

positive effect - on real interest rates

Answer 34

Inflation helps borrowers with loans at fixed interest rates.
Inflation rises, real interest rate falls, pay less interest

Question 35

positive effect - on asset prices

Answer 35

Asset prices may rise → increasing wealth effect as investors seek higher returning assets to beat the higher inflation figure

Question 36

rationale for inflation

Answer 36

• 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