1 Causes and impact of high inflation in Australia and ways to respond this issue by the government and RBA Student Number: 510424323 2 The majority of emerging markets and developing economies, not just established markets, are facing the effects of increasing inflation rates. In 15 of the 34 countries identified as Advanced economics (AEs) by the International Monetary Fund's Economic Outlook until December 2021, 12-month inflation was well above 5%. Such a large and broad surge in rampant inflation is unprecedented (World Bank, 2022). The yearly inflation rate in Australia enhanced to 5.1 percent in Q1 2022 from 3.5 percent in Quarter 4, surpassing sales expectations of 4 per cent and labelling the greatest interpretation since the emergence of the Sales tax in the early 2000s, trying to reflect soaring fuel costs and increasing construction costs (Trading Economics, 2022). This essay aims to evaluate the reasons and effects for increasing inflation in Australia and what actions can be taken by governments and the Reserve Bank of Australia (RBA) to overcome these issues. Inflation has increased in Australia due to a number of reasons. Some of which include persistent supply-side challenges created by Covid-19, Russia's attack on Ukraine, and increased demand as economies rebound from the pandemic, costs are increasing. As a result, interest rates and expectations about future policy interest rates have climbed. Rising prices for gasoline and some other goods lead to a further rise in inflation in the current quarter, based on the estimations made in May 2022 (Boycewire, 2022). It is also developed that the expansion of the supply of money is also responsible for inflation. This is taking place when the Fed is putting too much credit into the system of banking (Boycewire, 2022). Discretionary fiscal policy is also the reason behind inflation. Apart from that, the exchange rate as well as government taxation is also responsible for inflation. Increasing inflations is a key concern for the Australia economy. While inflation has increased throughout Australia; it is, however, still less than in many other countries; underlying inflation is 2.6 percent, while consumer price inflation is 3.5 percent (RBA, 3 2022b). Australia’s rise in inflation comes in different forms of inflation, cost push, demand pull, imported inflation and due to inflationary expectations. Excess demand is primarily responsible for demand pull inflation when aggregate demand is more than the productive capacity of the economy, driving up prices. On the other hand, cost-push inflation is taking place as the cost of production rises, which can be due to increasing claims related to wages, taxes of government and other charges often passed on to the consumers. When hyperinflation develops unexpectedly or at a high rate, it can create financial turmoil and fear of expenditure, suffocating the economic growth of Australia. Inflation can also render goods and services expensive for people on a limited income (RBA, 2022a). These unstable conditions can also cause lenders to lose a lot of money and also have a negative impact on Australia's trade. When inflation outperforms wages, people’s buying power is reduced. This is particularly true for retirees and other fixed-income people staying in Australia (RBA, 2022a). The government and RBA are taking various initiatives to respond to the issue of increasing inflation. For example, the Australian government made significant investments to get citizens through the last few years of the pandemic, as well as to reduce the economic impact of the lockdowns and avoid the high levels of unemployment that were predicted. The government is likely to have done a great job, but at a cost: Australia's government debt is now nearing $1 trillion, more than twice what it was before the pandemic. As a result, whenever the future value of the government's debt repayments falls due to inflation, the government is expected to be delighted. In order to deal with the situation of inflation, the Reserve Bank of Australia adopted an inflation target (RBA, 2022a). The Reserve Bank and the Government recognized the significance of the inflation expectations, and their accord was codified in the Declaration on the Execution of Monetary Policy. The Reserve Bank uses an inflation target to achieve its goals of stable prices, high employment, and the wealth and 4 happiness of the Australian people. It's because price stability, which is characterised as low and stable inflation, aids lengthy economic growth. The numerous expenses to the business connected with hyperinflation that is either too high or low are reduced when inflation is targeted at 2% to 3% (RBA, 2022a). The macroeconomic stance of the Australian government has been carried out via the use of monetary policies to affect the rate of interest further affecting inflation level. Both cash and interest rates have been adjusted to parallel inflation spikes in the economy due to impact of domestic operations of the market. However, monetary policy usage has a time lag and in the short term, its effects are not visible (RBA. 2022c). The RBA affects the rate of interest in the Australian economy as a preventive measure on the basis of the forecasts on unemployment, inflation and growth in the economy. High inflation is referred to as a negative externality of economic improvement leading to the decision of implementing contractionary policy of money by RBA (RBA, 2022b). For decreasing the fund supply to banks and lowering the liquidity of markets for increasing the cash rate, RBA sold Commonwealth Government Securities onto the cash market. Fiscal policy can also be implemented by the government for dealing with inflation (APH, 2022). Aggregate demand of the Australian economy is affected by taxation decisions and government expenditures. For achieving external stability and to counter cyclical, fiscal policy can be utilised for balancing economic fluctuations. By boosting government spending or lowering taxes, expansionary fiscal policy boosts aggregate demand. Fiscal stimulus is most suitable whenever an economy is in recession and generates less than its potential GDP. Recessionary fiscal policy reduces consumer spending by cutting government spending or raising taxes. A contractionary fiscal policy is most suitable when an economy produces more than its potential GDP. One's investments may well be influenced by fiscal policy both directly and 5 indirectly (APH, 2022). The effect of fiscal and monetary policy on the overall economy, interest rates, industries, and particular companies can be significant for shareholders. From the overall essay, it can be concluded that the increasing inflation in Australia directly affect its economy and it creates a range of difficulties for the organisation. As costs go up, people are forced to explore riskier investment practises in order to develop or maintain their income. Current initiatives of Australian government are not sufficient to address these issues. 6 References APH. (2022). Parliamentary Library. Retrieved from https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary _Library/pubs/rp/BudgetReview202122/FiscalOverview Boycewire. (2022). Causes-of-inflation. Retrieved from https://boycewire.com/causes-ofinflation/ RBA. (2022a). Australia’s inflation target. Retrieved from https://www.rba.gov.au/education/resources/explainers/pdf/australias-inflationtarget.pdf RBA. (2022b). Media-releases. Retrieved from https://www.rba.gov.au/mediareleases/2022/mr-22-11.html RBA. (2022c). Statement-on-monetary-policy-2022. Retrieved from https://www.rba.gov.au/publications/smp/2022/feb/pdf/statement-on-monetarypolicy-2022-02.pdf Trading Economics. (2022). Inflation CPI. Retrieved from https://tradingeconomics.com/australia/inflation-cpi World Bank. (2022). Return-global-inflation. Retrieved from https://blogs.worldbank.org/voices/return-global-inflation
