ECONOMIC ISSUES (TOPIC 3) – INFLATION
9.2 MEASURING THE RATE OF INFLATION
Inflation is a sustained increase in the general level of prices in an economy
Measure of inflation: % of change in Consumer Price Index (CPI) is the most widely used measure of
inflation in Australia
CPI summarises the movement in the price of basket
goods/services (wide selection of goods/services reflecting
average household spending pattern) reflecting general changes
in cost of living
Annual inflation rate is calculated by the % change in CPI
The ABS regularly updates weighting for each expenditure group to accurately reflect
average consumer purchasing patterns
9.3 RECENT TRENDS IN INFLATION
Australia has sustained low inflation after high inflations in 1970 & 1980s.
Key factor behind success: introduction of inflation targeting RBA targeted inflation rate at 2-3%
o After the high inflation era in 1970 & 1980s, Australia emerged from this recession with low
inflation levels
RBA locked into this lower inflation rate, increasing interest rates to slow down
growth in demand, thus curbing inflation rate rises
Microeconomic reforms increased competition within Australia and internationally competing for low prices
while productivity growth also improved, contributing to sustained low inflation
High inflationary pressures in 2005-2008 at 5.1% due to high global prices. As Australia was almost at NAIRU
low supply of workers forcing businesses to fight for these workers transferring this cost to the price of
goods (increase)
9.2 MEASURING THE RATE OF INFLATION
Inflation is a sustained increase in the general level of prices in an economy
Measure of inflation: % of change in Consumer Price Index (CPI) is the most widely used measure of
inflation in Australia
CPI summarises the movement in the price of basket
goods/services (wide selection of goods/services reflecting
average household spending pattern) reflecting general changes
in cost of living
Annual inflation rate is calculated by the % change in CPI
The ABS regularly updates weighting for each expenditure group to accurately reflect
average consumer purchasing patterns
9.3 RECENT TRENDS IN INFLATION
Australia has sustained low inflation after high inflations in 1970 & 1980s.
Key factor behind success: introduction of inflation targeting RBA targeted inflation rate at 2-3%
o After the high inflation era in 1970 & 1980s, Australia emerged from this recession with low
inflation levels
RBA locked into this lower inflation rate, increasing interest rates to slow down
growth in demand, thus curbing inflation rate rises
Microeconomic reforms increased competition within Australia and internationally competing for low prices
while productivity growth also improved, contributing to sustained low inflation
High inflationary pressures in 2005-2008 at 5.1% due to high global prices. As Australia was almost at NAIRU
low supply of workers forcing businesses to fight for these workers transferring this cost to the price of
goods (increase)
