Positive and negative effects of inflation

• Reduces deflation

• Loss in purchasing power

• Higher unemployment

  • price rises → input costs for firms become more expensive
    • → may force producers to reduce their workforce (cut costs and afford increasing wages being demanded )

• Lower exports & higher imports (← lower international comp)

  • domestic prices increase (relative to other nations) → Australia’s international competitiveness reduces
    • → lower demand for exports,
    • → & domestic import competing industries suffer
  • → worsens BOGS, CAD, eco growth

• Value of savings decreases

  • if interest rates do not keep pace with inflation (IR below inflation rates) → inflation erodes savings

• Increased inequality

  • low income earners have less bargaining power to demand increased wages to combat inflation

• Wage-price inflationary spiral

  • employees seek ++ wages due to inflation threat → higher prices → Cost-push inflation → spiral repeats

• Constrain economic growth

  • high inflation → potential gov contractionary policy to combat → constrains eco growth

• Resource misallocation

  • investment in speculative (short-term) assets may increase due to higher returns in short-term,
    • incentivised if return on savings is lower than inflation rates
  • → diverts investment, causing misallocation of resources

• Nominal wage is :: the pay received by employees in dollar terms for their contribution to the production process, not adjusted for inflation.

• Stagflation occurs when :: the rate of inflation and the rate of unemployment rise simultaneously.

International competitiveness

• As domestic prices increase → Australia’s international competitiveness reduces

Exchange rate impacts

• (short-term): May result in an appreciation of the ER
  • as speculators anticipate higher interest rates
• (long-term): depreciation of the ER

Riley questions

1. Inflation is a percentage change in the Consumer Price Index (CPI) over a period of time, it is considered a macroeconomic problem as the purchasing power of the dollar is derived from the goods that can be brought with it.
2. demand pull inflation is where prices of goods increase due to a increase in demand that exceeds the available supply (productive capacity)
   cost push inflation is where the supply of a good decreases with a mostly unchanged demand, due to costs associated with producing said goods having increased (caused by reduced productivity, scarcity of inputs etc.)
3. high inflation from 2022-2023 caused by a services inflation of 7.3% (including increased wage costs and costs for utilities), and the costs for imports have increased (due to continued global supply chain disruptions, and a depreciation of the dollar)
4. they both went up
5. food and non alcoholic beverages saw a 7.5% increase