Causes and Effects of Inflation in Australia and Policies to Control It

This essay discusses the main causes and effects of inflation in the Australian economy and policies that can be used by the government to control it. It includes statistical data on inflation rates in Australia and their impact on the economy. The causes of inflation discussed include government spending, regulation, managing national debt, and price rise in international markets. The effects of inflation on the economy include lower purchasing power, lower international competitiveness, and distortions in spending and investment. The policies discussed to control inflation include contractionary monetary policy and supply side policy.

Assessment

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Explaining main causes along with effects of inflation and discussion of policies which could
be used by government of Australia to control inflation in the economy...................................1
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
In an economy, government of the country uses macroeconomic policy for the purpose of
attaining significant social as well as economic goals that have wider together with long term
implications for stability, prosperity together with equity of population (Beaudry and Ruge‐
Murcia, 2017). Within Australian economy, significant challenges are faced in the area of
macroeconomic policy in time period ahead. At same time, there are huge measures undertaken
or applied by government for effectively responding towards the challenges.
The essay address what is inflation, its main causes and effects. It also discusses policies
which can be used by Australian government to control inflation in the economy.
MAIN BODY
Explaining main causes along with effects of inflation and discussion of policies which could be
used by government of Australia to control inflation in the economy
Inflation is termed to a situation in which too much monetary resources chases too few
products and services. It is an economic term which is described to a circumstance of rising
prices of commodities or services in specific economy. It not only impacts costs of living
including things like, electricity, transport and food, rather affects interest rate on savings
account, organisational performances and in turn, prices of share (Ghorbani Dastgerdi, Yusof
and Shahbaz, 2018). It is measured by consumer price index that is comprehensive measurement
tool for average changes in prices over time which households or consumers pay for basket of
items and services.
Figure 1: Australia: Inflation rate from 1986 to 2026. 2021
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(Source: Australia: Inflation rate from 1986 to 2026. 2021)
The above statistical data determines inflation rate in Australia from the year 1986 to
2020, with forecast until 2026 (Australia: Inflation rate from 1986 to 2026. 2021). Inflation rate
is measured with the help of price increase of defined commodity basket. In the year 2020,
average inflation rate in Australia was about 0.87 percent compared to the year 2018 that is
1.61%.
Causes of inflation in Australian economy
Australian expected inflation of 4.1% annually, that is highest inflation Expectations for
nearly two years since October 2019 (Inflation Expectations increase to 4.1% in July, highest for
nearly 2 years since Oct 2019, 2021). Moreover, pandemic of COVID-19 has accelerated
inflation to 3.8% in three months through month of June from the year 2020 which is fastest pace
since 2008. it is because of perfect storm of supply chain that is disrupted from COVID-1,
government spending for filling economic void. In the economy of Australia, spending of
government in the pandemic is determinant of aggregate demand. Increase of spending by
government in the country invariably created inflationary pressure on economy of the nation.
Other cause of Inflation in the economy of Australia is regulation of government. It is
determined that imposition of new legislation addition to tariffs by political leaders of country
makes it expensive for business to manufacture or produce commodities and import them. All
the higher expenses are passed by organisations to consumers in form of increased prices that
causes cost push inflation (Makin, Robson and Ratnasiri, 2017). For example, when expansion of
money supply by government devises speculative boom in prices, cost of products of all types of
uses rises which leads to rising consumer price index, reflecting towards various measures of
inflation.
Managing national debt also causes inflation in an economy. At the time when national
debt skyrockets, one of the option to manage national debt is printing more money. It causes
demand pull inflation wherein increase in money supply and credit stimulates overall product
demand in the economy for enhancing more rapidly than production capacity of economy. It
results in increasing demand and rise in prices causes situation of inflation.
Price rise in international markets also causes inflation in a country (Findlay and
Garnaut, 2017). It is determined that there are some products which need imports of commodities
or production factors from international markets, for example, United States. In context to
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Australia, when global markets raise prices for commodities, then overall costs in the country
increases that leads to inflation in domestic market.
Effects of inflation on economy of Australia
Inflation is steady increase in prices for goods and services over specified time period
that has many positive and negative effects on an economy (Amos, Rahman and Gathenya,
2018)2. In context to economy of Australia, inflation effects purchasing power. When prices
increase faster than nominal income of people, it impacts on their affordability or purchasing
fewer products and services than before. At same time, inflation makes spending and
investment more distorted. High inflation in the influences households to make more purchases
as well as organisations to make decision of investment. For instance, when households of
Australia predict higher inflation, they make buying sooner than originally planned in order to
avoid more payments. Inflation effects returns on investment as it the situation foster decision
making to make investment as higher inflation rate reduces real investment returns.
Within the economy of a nation, inflation effects are seen in real interest paid by
borrowers to lenders. When inflation turns out to me more than predicted at the time of loan
agreed, lender receive less than what they planned. It is because inflation erodes purchasing
power of interest earning that are received by them. Moreover, inflation also lower nation’s
global competitiveness. It is because higher inflation in one nation makes production of goods
more expensive in comparison to other nations till deprecation of currency.
When there is lower inflation in any economy, it effects businesses as they face complex
situations which makes it hard for them to reduce real wages of their personnel and resort to
laying off people instead (Borrallo and Del Rio Lopez, 2021). It is because lower inflation
creates a requirement for declining of real wages to permit nominal wages to grow at rate which
is below general inflation rate. Moreover, lower inflation rate also effects on making consumers
delay purchases when they expect prices to fall. In essence, falling prices results in lower
spending in an economy which puts further downward pressure on demand addition to prices.
Policies that can be used by government of Australia to control inflation in the economy
Inflation in an economy could be controlled through policies which boost growth rate of
aggregate supply and slow down growth of aggregate demand. Some of the policies that could be
used opted by government of Australia to have control on inflation are as discussed:
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One of policy which could be used by Australian government to control inflation is
contractionary monetary policy. It is a policy undertaken with the aim of reducing inflation with
the help of limiting amount of active circulation of money in the economy (Bleaney, Morozumi
and Mumuni, 2020). In Australian’s economy, the policy can help in reducing money supply
through decreasing bond prices as well as enhancing interest rates. With this, spending by
population could be reduced as when there is less money to go around then people would keep it
and save it rather than spending. It will lead to lesser availability of credit which halts rate of
inflation. For instance, when Reserve Bank of Australia enhances interest rate, financial
institutions have no choice rather to increase rates as well. At the time of increment of interest
rates by banks, fewer people prefer to make borrowing of money as it costs more to do while
money accrues at higher interest. It will drop spending and prices that will play significant role in
controlling inflation in the economy.
Supply side policy could also be used by government of the nation for controlling
inflation in the economy. It is an attempt of government for enhancing productivity together with
efficiency in an economy. When successfully used, it shifts aggregate supply to right and shows
higher growth of economy in long run (Baharumshah, Sirag and Soon, 2017). In association to
economy of Australia, supply side policy could be used for fostering productivity, innovation
and competition that can assist to control inflation or maintain lower prices. it includes policies
for opening a market to more competition for enhancing supply and reducing prices.
Furthermore, reduction in taxes that enhances risk taking together with incentives to work could
lead to cut in income taxes. Supply side policy could control inflation by reducing company
taxation for encouraging wider investment.
CONCLUSION
From the above essay, it is concluded that inflation is decrease in purchasing power of
particular currency over time. Inflation is said to a period of rising product prices in an economy.
Ina n economy, some causes of inflation are increase in spending of government, price rise in
global market, managing national debt and regulation of government. Inflation causes effects on
purchasing power, lower nation’s international competitiveness, real interest paid to lenders by
borrowers and distort spending and investment. Contractionary monetary policy and Supply side
policy are key economic policies that could be used to control level of inflation in an economy.
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REFERENCES
Books and Journals:
Amos, C. C., Rahman, A. and Gathenya, J. M., 2018. Economic analysis of rainwater harvesting
systems comparing developing and developed countries: A case study of Australia and
Kenya. Journal of cleaner production. 172. pp.196-207.
Baharumshah, A. Z., Sirag, A. and Soon, S. V., 2017. Asymmetric exchange rate pass-through in
an emerging market economy: The case of Mexico. Research in International Business
and Finance. 41. pp.247-259.
Beaudry, P. and Ruge‐Murcia, F., 2017. Canadian inflation targeting. Canadian Journal of
Economics/Revue canadienne d'économique. 50(5). pp.1556-1572.
Bleaney, M., Morozumi, A. and Mumuni, Z., 2020. Inflation targeting and monetary policy in
Ghana. Journal of African Economies. 29(2). pp.121-145.
Borrallo, F. and Del Rio Lopez, P., 2021. Monetary Policy Strategy and Inflation in Japan
(Estrategia de política monetaria e inflación en Japón). Banco de Espana Occasional
Paper, (2116).
Findlay, C. and Garnaut, R. eds., 2017. The political economy of manufacturing protection:
Experiences of ASEAN and Australia. Routledge.
Ghorbani Dastgerdi, H., Yusof, Z. B. and Shahbaz, M., 2018. Nexus between economic
sanctions and inflation: a case study in Iran. Applied Economics. 50(49). pp.5316-5334.
Makin, A. J., Robson, A. and Ratnasiri, S., 2017. Missing money found causing Australia's
inflation. Economic Modelling. 66. pp.156-162.
Online:
Australia: Inflation rate from 1986 to 2026. 2021. [Online]. Available through: <
https://www.statista.com/statistics/271845/inflation-rate-in-australia/>
Inflation Expectations increase to 4.1% in July, highest for nearly 2 years since Oct 2019. 2021.
[Online]. Available through: < https://www.roymorgan.com/findings/8761-australian-
inflation-expectations-july-2021-202108030239>
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