Low Inflation

Consumer Price Index (CPI)

A measure of the average changes in retail prices of a range of goods and services purchased by typical Australian metropolitan households each quarter

Rate below 2%

Causes deflation to occur. Sees a huge reduction in AD, as households will continue to wait for longer periods of time in order to get the lowest price possible. This may diminish economic growth and result in higher levels of unemployment.

Limitations of Using the CPI

Changes in consumer tastes or new products entering the market may not be measured by the survey, and it does not record price changes for non-metropolitan households

Consumer/Business Confidence (AD Factor)

Increasing levels of confidence reflect an optimistic view of the financial future by consumers and businesses, and can put demand pressure on prices to rise. However, high, unsustainable levels of business and consumer confidence lead to increased economic growth and aggregate demand, meaning an increasing pressure on inflation rates.

Erosion of Purchasing Power (Factor)

Inflation means that consumers of goods and services will be paying more for these products over time, which erodes the purchasing power of any given level of income. Those 'lower-skilled' employees with little economic strength are no more likely to experience a reduction in their 'real-wage'. This means the purchasing power their wage falls over time, and their material living standard begin to decline.

Productivity (AS Factor)

Lower productivity has negative supply side effects because it causes an increase in the average costs of production for businesses to reduce supply to the market. This then results in upward pressure on Inflation as higher costs are typically passed onto the consumer.

Cost Inflation

Occurs when production costs increase and are passed onto consumers through higher prices.

Demand Inflation

Occurs when the general level of prices is rising. This is due to demand being greater than the economy's capacity to supply sufficient goods and services to match this demand.

Stagflation

Prices of goods and services rise, while spending decreases and unemployment increases

The Goal Of low Inflation

The RBA's Goal Of Low Inflation is between 2-3%. This rate ensures both stability and sustainability in the overall economy, as products appear competitive in price.

Inequality In society (Factor)

The better off are usually more able to protect themselves against the damage created by inflation. They may even be able, through the use of speculative investments, to take advantage of the rising prices, buying more and selling when the price has increased. the less powerful and poorer members of the community are unable to create 'hedges' against inflation and find that their real income decreases. Thus lowering their material living standards.

Headline rate of inflation

The rate of inflation as captured by price movements of all goods and services contained in the CPI.

Underlying rate of inflation

The rate of inflation that provides the best indicator of the predominant price pressures existing the economy.

Rate above 3%

This rate will result in a contraction in AD and consumption, as households' purchasing power will be diminished as they do not obtain enough real disposable income to purchase goods and services.