Quick questions on Inflation in Australia: measurement, causes and effects (HSC Economics Topic 3)

Inflation is the sustained increase in the general price level of goods and services in an economy over time.

The ABS produces the Consumer Price Index (CPI) quarterly (cat. no. 6401.0). The CPI tracks the cost of a basket of goods and services bought by metropolitan households, including housing, food, transport, education, health, recreation and other expenditure.

Headline inflation is the full CPI, including volatile items.

A textbook case of the three causes acting together:

1. Demand-pull inflation. Excess aggregate demand pushes the economy beyond its productive capacity. AD/AS framework: a rightward shift in AD when the economy is at or near LRAS produces inflation.

Inflationary expectations. When households and businesses expect future inflation, they negotiate higher wages and set higher prices, validating the expectation. The RBA monitors inflation expectations from union surveys, financial markets and consumer surveys.

1. Reduced real purchasing power. Money wages must keep pace with prices to maintain living standards. Real wages fell in Australia in 2022 and 2023 as inflation outran the Wage Price Index.

The RBA's target is headline CPI of 2 to 3 percent on average. The RBA Statement on Monetary Policy (every quarter) is the canonical source for inflation analysis. The 2022-23 tightening cycle was the fastest in 30 years: the cash rate rose from 0.10 percent to 4.35 percent in 18 months.

Excess aggregate demand pushes the economy beyond its productive capacity. AD/AS framework: a rightward shift in AD when the economy is at or near LRAS produces inflation.

Rising costs of production passed through to prices. AD/AS framework: a leftward shift in SRAS produces inflation and lower output (stagflation in extreme cases).

Rising prices of imported goods and services, often driven by exchange rate depreciation or global shocks.

When households and businesses expect future inflation, they negotiate higher wages and set higher prices, validating the expectation. The RBA monitors inflation expectations from union surveys, financial markets and consumer surveys.

Wage and price contracts make inflation slow to adjust. Service inflation (40 percent of CPI) is particularly sticky because of long-term contracts and labour-intensive cost structures.

Inflation is the rate of change of the price level.

It excludes asset price inflation (housing, equities), under-weights some items (housing services), and assumes a fixed basket.