Topic 8: Inflation Flashcards
What is Inflation?
Inflation is defined as a persistent and appreciable rise in the general level of prices
What is the Target rate?
The target is between 2-3%
Measurement of Inflation
CPI (Consumer Price Index)
What CPI measure
CPI measures changes in the prices of a basket (sample) of goods and services bought by the Australian Households from one quarter to the next
Weights
Weights are attached to each commodity in the CPI basket in order to reflect its importance in the pattern of expenditure in an average household
ABS and what they do?
The ABS reviews weight each year to ensure that goods, and services in the basket are an accurate reflection of average household buying patterns
Calculation
rate = (CPIy2-CPI y1) / CPIy1 x100
Headline Inflation
The broad measure of change in the cost of purchases made by wage and salary households in capital cities
- Accounts for seasonal price movements (fruit and veg) and volatile prices such as automotive fuel prices and housing costs
Underlying Inflation
the general increase in prices over time, not including the prices of particular things such as energy, food, or mortgage
- Gives a better picture of the true rate of inflation
Trimming mean
trimming removes the impact of irregular price movements. calculated by arranging all movement from largest to smaller then ‘trimming away’ the top 15% and bottom 15% of price movements
Weighted median
The rate of price change of the item in the middle of the price changes in the CPI basket
Limitations
- only reports price movement in metropolitan areas and is not regarded as a true cost-of-living index
- Don’t reflect changing consumer preferences
Can’t account for changes in quantity goods overtime
Demand-pull
“Too much money too few goods” - households spending more than they normally would causing prices to rise due to competition for the goods and services
Cost-push
Cost-push inflation occurs when the rising production costs are passed on to consumers who then pay higher prices for final goods and services
Demand-pull causes : indicators that suggest prices may rise due to higher aggregate demand
- Caused by high levels of demand
- associated with expansion/boom
phase of the business cycle when
aggregate demand is high - High levels of AD indicates by high
levels of consuming and investing - High demand for limited resources -
competition for resources pushes the
price up - COVID-19 - Household changing spending patterned \
, savings increased at first due to uncertainty and that was available to use with the availability of the vaccine, low interest rates encourage burrowing - consuming and investing, created payment programs to encourage spending
