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.