Australian Governments
Economic Goals
• Low Inflation
• Strong and sustainable economic growth
• Full employment
•Equity in the distribution of Income
• External stability
Economic goal
Low inflation
A Definition of Inflation
• Prices of goods and services will be changing
on a regular basis in a market capitalist
economy.
• Some prices of goods or services fall over time
for a number of reasons. EXAMPLE ?
• Conversely, other prices increase over time for
a variety of reasons.
• INFLATION: refers to a sustained increase in
the general or average price level over time.
The RBA’s low inflation goal
• The Reserve Bank of Australia (RBA) is the
government body with the primary responsibility
for achieving ‘stability of the Australian
currency’.
• This is commonly referred to as the RBA’s goal of
low inflation
• DEFINITION OF GOAL: The government’s
goal of low inflation is achieved when general
prices for goods and services are increasing fairly
slowly, and at a rate less than that of our trading
competitors.
The RBA’s low inflation goal
• TARGET – To keep the Consumer Price Index
(CPI) within the target range of 2 – 3% on
average over the course of the economic cycle
(5 to 8 years)
Inflation and Living Standards
• Inflation above the RBA’s target is usually seen as
unfavourable because it generally has adverse effects
on the achievement of other government goals,
ultimately eroding the living standards of Australians.
Impact of High Inflation on Living
Standards
1. Real purchasing power of income is reduced
– Real income is reduced
– It requires more dollars to buy the same amount
– This is disadvantageous for fixed income earners
– They still have the same income but now will use
more money to buy products
Impact of High Inflation on Living
Standards
2. Loss in international competitiveness
– Inflation that is greater than the level being
experienced by Australia’s trading partners will
tend to worsen our international competitiveness.
– This means Australia’s tradeable sectors will
find it increasingly difficult to maintain their
market share in the global economy.
– This will lead to lower net exports, lower AD and
lower levels of economic growth
Impact of High Inflation on Living
Standards
3. The economy is less efficient in allocation of
resources
– Inflation encourages speculative investment to try and
protect against rapid price rises
– As a result investment may be diverted away from
productive areas (capital) that create wealth and jobs
towards those investment opportunities that offer the
best protection against inflation such as gold, artwork,
collectable.
– This undermines efficiency in resource allocation and
eventually slows the long-term sustainable rate of
economic growth and depresses living standards.
Impact of High Inflation on Living
Standards
4. High inflation erodes confidence
– There is uncertainty in the economy
– It is usually accompanied by high interest rates
which slows household spending and business
investment.
Impact of High Inflation on Living
Standards
5. Worsening of income inequality
– Fixed income earners such as self-funded retirees or
those on a government pension become poorer because
their incomes do not keep up with rising prices.
– However, those whose incomes are upwardly flexible
like speculators (those willing to take financial risk in
return for larger gains) can end up with rising incomes
and enjoy better living standards.
– Exporters become less internationally competitive, so
their sales fall. Importers may gain because of stronger
sales. The economy’s balance of payment deteriorates.
Impact of High Inflation on Living
Standards
5. Worsening of income inequality.
– Ordinary families who have taken out a variable
mortgage or home loan find that their housing
affordability declines as rising interest payments take
up a higher proportion of their family incomes.
– Workers may become unemployed because inflation
has caused businesses to close. These people face
greatly reduced incomes, purchasing power and
living standards surviving on welfare benefits.
Measuring the inflation rate
• Price rises are generally measured quarterly, but inflation
rates are quoted as an average annual figure. The main
measure is the Consumer Price Index.
• Consumer Price Index (CPI): a measure of the
variations in the retail prices of a basket of goods and
services representing a high proportion of the
expenditure of most metropolitan households.