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The probing questions raised by many!

the following offers answers and explanations. 

 For some, the recent inflationary pressures came as a surprise, an unknown phenomenon while for others, those who experienced high inflation in the early 70’s to late 90’s, it was a return nightmare. Like me you may recall those challenging times and bad dreams.

• So, what is Inflation!

‘Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices. Typically, prices rise over a given time.’ This includes commodities such as food grains, fuel, transport and utilities like electricity. And not to forget services for healthcare, entertainment, and labor. 

It will be experienced and viewed differently, positively or negatively, depending on your circumstances, and rate of change.

The Consumer Price Index (CPI) is the indicator used to measure the percentage change in the price of a basket of goods and services consumed by households. 

Simply said, the economic cycle and the interest rate cycle are intertwined and in theory, interest rate changes should follow the economic cycle. For example, The Reserve Bank raise interest rates to slow down the economy and avoid inflation when the economy is growing rapidly, and inflationary pressures are increasing. The situation we are currently experiencing.

• What does it mean to Households, Consumers, Businesses

Cost-of-living pressures, rising prices of everyday goods and services, and declining purchasing power of the dollar are putting a strain on average households, stretching their budgets.  As monetary policy responses kick-in, home buyers, mortgagees face increased interest rates and repayment, while renters have higher costs as housing investors pass on their borrowing expenses. Housing costs are at a new high for a number of reasons, including limited stock (demand and supply tensions).

•   Is inflation something new? No!

Australia’s inflation history since the introduction of the CPI can be broken down into four main phases: (i) The initial post-war recovery and the ‘Korean War boom’; (ii) the disinflationary period from 1953 to 1972; (iii) high inflation from 1973 to 1990; and (iv) the period since the introduction of inflation targeting by the RBA. 

• Snapshot: the Inflation Rate in Australia averaged 4.89 percent from 1951 until 2023, reaching an all time high of 23.90 percent in the fourth quarter of 1951 and a record low of -1.30 percent in the second quarter of 1962.

•  What does it look like!

Inflation can be described as two categories; demand-pull inflation and cost-push inflation. 

1. Demand-pull inflation happens when high consumer demand exceeds the supply. When consumers have more money, it leads to ‘positive’ consumer sentiment, which translates into greater spending. Increased demand, and supply disruption, create a supply gap, resulting in higher prices.
2. Cost-push inflation occurs when prices rise due to supply issues. When Businesses can't keep up with production of manufactured goods due to rising raw material prices, they must sell their goods at higher prices.

• What are the causes!

Examples, are supply chain vulnerability, increased housing demands, and service industry challenges.

Since 2020, high inflation in Australia is attributed to various events including, supply issues related to the Ukraine war, other global supply disruptions due to the COVID-19 pandemic, and domestic supply problems caused by extreme bad weather. It’s cost-push pressures resulting from international conditions including fuel supply and prices.

Plus, demand driven by domestic and global markets, reflecting the rapid economic recovery following the significant fiscal and monetary stimulus policy responses to the pandemic and the faster-than-expected development of effective vaccines. 

Problems and Solutions 

•  How do we beat inflation

In Australia the Reserve Bank conducts monetary policy and is a means to control inflation. This policy aims to achieve goals of price stability, full employment and economic prosperity and welfare of Australians. It does this by targeting inflation at between 2-3%. By raising interest rates, the Reserve Bank aims to deter consumer spending and limit the purchase of higher risk assets. This policy was applied in 2023 with total rate increases of 1.25% per annum.

Government can also assist in beating inflation through its fiscal policies, by reducing spending and increasing taxes.

There's more to this inflationary story!

Check our BLOG "Interest rates 70 years - 1970 to 2024".