Quick questions on Inflation - TCE Economics (Tasmania)

Inflation is measured by the Consumer Price Index (CPI), compiled quarterly by the Australian Bureau of Statistics. The CPI tracks the price of a fixed basket of goods and services bought by a typical metropolitan household, weighted by how much households spend on each item. The inflation rate is the percentage change in the CPI.

Demand-pull inflation occurs when aggregate demand grows faster than the economy can produce, so spending pulls prices up. In AD-AS terms, the AD curve shifts right while the economy is near capacity, so the steep part of the aggregate supply curve turns extra spending into higher prices rather than more output. Strong consumer spending, a stimulatory budget, low interest rates or a surge in exports can all drive demand-pull inflation.

Cost-push inflation occurs when rising production costs force firms to lift prices even without strong demand. In AD-AS terms, the aggregate supply curve shifts left. Common triggers are wage rises that outpace productivity, higher imported input prices following a depreciation, and supply shocks such as a spike in oil or energy prices. Cost-push inflation is especially difficult because it raises prices while reducing output, the stagflation problem.

High and unpredictable inflation damages the economy in several ways. It erodes the purchasing power of money, hurting people on fixed incomes and savers. It creates uncertainty that discourages business investment and long-term planning. It distorts price signals, making it harder to tell genuine relative price changes from general inflation.