INFLATION AND EXTERNAL STABILITY

INFLATION

9.1 – Introduction

- Inflation: the sustained increase in the general level of prices over a period of time, usually
on year
- An economic problem that can have negative impacts on many economic outcomes
including:
o Economic growth
o International competitiveness
o Exports
o Income inequality
- Maintaining low inflation = major objective of economic policy
o Since low inflation has benefits in the long run
- Aus has sustained relatively low levels of inflation since the early 1990s

MEASUREMENT

- Best known and most widely used measure of inflation in Australia is the percentage change
in the CONSUMER PRICE INDEX (CPI)
o CPI : summarises the movement in the prices of basket of goods and services
weighted according to their significance for the average Australian household
- Inflation rate (%) = CPICY – CPIPY) / CPIPY x 100/1
o Where CPICY = the value of the CPI in the current year
o Where CPIPY = the value of the CPI in the previous year
- The basket of goods and eservices used to calculate CPI does not include all goods and
services available in the economy
o But covers wide selection that REFLECTS AVERAGE HOUSEHOLD SPENDING
PATTERNS
 Therefore gives a good indication of overall movement of prices of
consumer goods
 Reflects general changes in the COST OF LIVING ( = how much consumers
have to pay for the goods and services the buy)
o CPI is compiled by the ABS and published every 3 months
- The weights given to expenditure groups in the basket are based on the ABD Household
Expenditures Survey (insert table)
- CPI excludes some items of household spending such as changes in mortgage interest rates
and consumer credit changes
o Additionally does not include prices of property or lang, so the changes in residential
property prices in recent years have not been reflected directly in the CPI
- Official or “HEADLINE” rate of inflation is calculated using the CPI
o Can be MISLEADING indicator of ongoing price pressures int eh economy because t
includes some goods and services that have volatile prices or are affected by one-off
factors
 Hence economists at the RBA prefer to look at the UNDERLYING inflation
levels
  Aka “CORE” inflation
 Underlying inflation removes the effects of one-off or volatile price
movements  therefore tends to be less variable than headline inflation
- Measures of underlying inflation
o No single measure of underlying inflation in Australia
o Both treasury and RBA have their own calculations of underlying inflation rate
o Most economists focus on 2 measures of the underlying inflation rate:
 The trimmed mean inflation
 Determined by calculating the average inflation rate after excluding
the 15 per cent of items with the largest price increases and the 15
per cent of items with the smallest price increases (or largest price
falls) from the CPI
 The weighted mean:
 Calculated by comparing the inflation rate of every item on the CPI
and identifying the middle observation
 The inflation rate of half to the items in the CPI will be greater than
the weighted median inflation rate, asnd the inflation rate of the
other half will be less than it
o When RBA refers to its own estimate of underlying inflation = AVERAGE OF ITS TWO
MEASURES
 (trimmed mean inflation + weighted mean inflation rate) / 2
- In recent years headline and underlying inflation has been low
- During certain periods they can move in the opposite direction  such as during COVID
o Headline inflation fell from 2.2% at end of march 2020 to -0.3% 3 months later
 only to climb back to 3.7 % in June 2021
o Underlying inflation by CONTRAST was relatively steady  just below 1.5%
o Therefore headline inflation alone can give idea that inflation is volatile, but the
underlying inflation points to the real ongoing trends
- Underlying inflation can be either below or above headline inflation rate
o Eg: on off dramatic falls in the prices of CERTAIN GOODS such as in 2020 when child
care costs went to zero as a result of government subsidy during COVID-19
pandemic  reduced the headline inflation rate
 But had a much smaller impact on the underlying inflation rate

MAIN CAUSES OF INFLATION

- Economists generally recognise 4 main causes of inflation

o Demand-pull
o Cost-push
o Inflationary expectations
o Imported inflation

Demand Pull Inflation

- Demand pull inflation occurs when AGGREGATE DEMAND is growing while the economy is
nearing its supply capacity, so that higher demand leads to higher pries rather than more
output
- In market economy  prices determined by interaction between supply and demand forces
- When AD > productive capacity of economy
 o Prices rise since output cannot expand any further in the short term
o Consumers bid against each other for the limited goods and services available 
forces the prices up
o Consumers willing to pay a higher price for any given level of supply
- Price increase that results from higher AD = demand-pull inflation
- (insert diagram)

Cost Push Inflation

- Cost push inflation occurs when there is an INCREASE IN PRODUCTION COSTS (such as oil
price increases or wage increases) that producers pass on in the form of higher prices, thus
raising the rate of inflation
- When production costs rise  firms attempt to pass them pm to consumers by raising the
prices of their products
- Producers face higher costs so they now supply less quantity for any given price level
- Major sources of cost-push inflation in the Australian economy
o Wages
 When wages increase faster than productivity growth  cost of labour for
each unit of output increases
 Since wages make typically 60% of each firm’s costs, firms will attempt to
pass on the wage increase to consumers in order to maintain their
profitability
o Price of raw materials such as: fuel
 Increase in price of fuel or other raw materials will generally lead to an
increase in the price of the final product too as firms ill pass on the increase
in prices in order to maintain their profit margins

Inflationary Expectations

- If individuals in the economy expect higher inflation the future, thy may act in a way that
causes and increase in inflation
- 2 ways in which inflationary expectations can cause inflation:
o If the prices of goods and services are expected to increase in the economy
consumers will attempt to purchase produces before prices increase
 Consumers bring forward their planned purchases  increase in
consumption  results in higher demand pull inflation
 If firms expect that demand for their product will increase  they may also
raise prices in order to maximise their profits = increase in inflation
o If employees expect inflation to increase they will take this into account when
negotiating their wage increases
 Workplace contracts are typically negotiated in advance for the next 2 years
or 3 years
 Therefore an employee who expects higher inflationary pressures over the
next few years will ask for a higher wage rise to preserve the purchasing
power of their wage
 Higher wage increases may be passed on by firms = cost push inflation
- Managing inflationary expectations = major challenge for policymakers
- Once individuals expect higher inflation  they will act in a way that accelerates inflation
o = they fulfill their own prophecy
 o Strong inflationary expectations can entrench high levels pf inflation in the economy
and it may take significant economic contraction (such as recession of early 1990s)
to bring these expectations down

Imported Inflation

- Inflation transferred to Australia through international transaction

- Rise in import prices = most obvious cause of imported inflation
o An increase in price of imported goods will increase the inflation rate the same way
as an increase in the price of domestically produced goods
- Depreciation of the Australian dollar will also increase the domestic price of imports  leads
the inflation
- Extent to which an increase in import prices / or fall in aus dollar will lead to consumers
paying higher prices for imports depend on market conditions
- If imports face i=competition from locally made products, importers may reduce their profit
margin and not pass onto consumers the full effect of overseas price rises or a depreciation
- Rba research paper In 2015 noted that:
o Imported inflation now accounts for a much larger share of the variability in the
headline inflation rate than in the pas
o = the extent of australia’s integration with the global economy
- International factors can also be significant in reducing inflation in Australia
- Sharp fall in fuel prices in June quarter of 2020 contributed to the lowest headline inflation
rate since 1931
- Low fuel prices directly reduce inflation because they are a significant item in the basket of
goods and services used to measure the CPI
- And also indirectly because they lower prices costs for Australian businesses

Other Causes:

- 2 other possible causes of inflation:

o Government policies: may directly influence the level of inflation
 By increase indirect taxes = impact on general level of prices
 Eg: in a 2018 address the Deputy Governor of the RBA noted that tobacco
excuse increases of 12.5% per year from 2013 to 2020
 This made tobacco the single largest contributor to headline
inflation in this period
 In 2020: government’s decision to make childcare free for parents due to
the COVID-19 pandemic was a factor in reducing the headline rate of
inflation to below zero
 Other measures that may influence prices include:
 Deregulating an industry
 Changing tariff rates
 Imposing price controls
 Price monitoring
 Increasing charges for goods and services provided by the Australian
government

- It is is possible to have all above types of causes of inflation operate at the same time
 - Often on r 2 types of inflation are more prominent at a particular point in time
- During the mid-1970s and early 80s
o Inflationary expectations and cost push inflation tended to be more prominent
- Late 1980s
o Saw demand pull inflation
- Introduction of GST in 2000
o Highest headline rate of inflation since adoption of the 2-3% target
o = shows the influence of federal government policy on inflation
- Commodities boom of 2000s
o Significantly increased business investment and consumer confidence
o  Increasing aggregate demand  increased demand pull inflation
- More recently:
o Inflationary expectations have been subdued due to persistently low wage growth
- Slower economic growth in the late 2010s weakened demand pull pressures
- On the other hand: depreciation of aud dollar between 2015-2019 increase imported
inflationary pressures particularly in retail industry
- Impact of COVID and the recession meant that Australian entered the 2020s amidst its most
sustained low-inflation environment for at least half a century
o However in 2021 on 10-year government bonds experienced the is biggest month
increase since 1994
o = indication that markets expected inflation to rise as the economy recovered after
the COVID-19 recession

(GENERAL) EFFECTS OF INFLATION

- Inflation has impacts on the economy in short and long term

- Generally – the higher the inflation the more negative the consequences
- Which is why government’s around the world give priority to sustaining low inflation in
order to avoid the negative consequences which high inflation brings

Economic Growth and uncertainty

- Inflation in ordinary economic circumstances, inflation is regarded as one of the major

constraints on economic growth
- Excessive economic growth tends to raise inflationary pressures through:
o Increased wage demands
o Strong consumer bidding up price levels
- Sustained lower inflation allows moderate economic growth to be maintained without ir
becoming necessary to curtail growth through higher interest rates
- Sustained low inflation since early 1990s allowed for a long period of relatively high
economic growth for Australia
- Overall terms: higher inflation distorts economic decision making since producers and
consumers change their spending and investment decision in order to minimise the effect of
inflation on themselves
o Eg: buying assets rather than investing in income producing activities
- Low inflation has beneficial effect on level of economic growth
 o It removes the distortion to investment and savings decision that is caused by higher
inflation
- High inflation discouraes business investment
o Makes producers uncertain about future price and costs
o Therefore uncertain about future profit levels
- Low inflation has positive impact on business investment
o Restores the incentive to invest in long-term productive assets rather than short-
term speculative investments (which high-inflation environments encourage)
- High inflation also distort consumers’ decision to spend of save disposable income
- Consumers more likely to spend and not save during periods of high inflation
o Because purchasing power of money is reduced over time
- Sustained low inflation is likely to encourage consumer to save higher proportion of their
disposable income
- However australia’s recent experiences suggest that other factors such as:
o House prices
o Auperaanuation
o Broader economu outlook
 can have more importance in influenceing the overall level of savings in the
economy
- when the economy is performing strongly, and people’s assets are rising in value
o consumption rises and the savings rate falls
o even when inflation rates are low

Wages:

- nominal wage = pay received by employees in dollar terms for their contribution to the
production process, NOT ADJUSTED FOR INFLATION
- the level of inflation is a major influence on nominal wage demands
- during periods of high inflation:
o employees will seek larger wage increase
o in order to compensate for erosion of purchasing power of their nominal wage
o = emergence of wage-price inflationary spiral
 Difficult to break
 Wage increase lead to higher prices
 Which lead to higher wage demands and so on
- Australia has not experienced wage price spiral since the 1980s
o And in more recent years the opposite has occurred as lower inflation rates have
helped to reduce annual wage growth o=to only just over 2%
- As Australia emerges from COVID-19 pandemic:
o Expected for rate of inflation to exceed the growth of nominal wages
o Therefore real wages decline as employees lose purchasing power due to prices
increasing at a higher rate than their income

Income distribution:

- High inflation rates tend to have negative impacts on distribution of income

- Lower-income earners often find that their incomes do not rise as quickly as prices
 - Lower income earners may also face higher interest rates on their borrowings if inflation
rises
- In general high rates of inflation hurt those individuals may face higher interest rates on
their borrowings if inflation rises
- High rates of inflation hurt those that are on fixed incomes or who’s incomes are not
indexed (or rise as fast as) the rate of inflation
- Higher inflation rates can also erode their value of existing savings so that individuals who do
not have means of protecting their savings from the impact of inflation will see their net
wealth decline

Unemployment:

- Levels of unemployment and inflation are closely related – especially in short term
- High levels of inflation usually result in more contractionary fiscal and monetary policy
o = slower economic growth and higher unemployment in short-medium term
- Periods characterised by high levels of unemployment often also have low inflation rates
- While low levels of unemployment usually associated with rising inflation
o Insert Phillips curve
- Previously government shoes between the priority of low inflation (and slower growth) or
lower unemployment ( + risk of rising inflation)
- However over long term this inverse relationship breaks down
- Eg: mid-1970s Australia experienced simultaneous increase in inflation and unemployment
o = stagflation : when rate of inflation and rate of unemployment rise simultaneously

Exchange Rates:

- Economic theory of purchasing power parity says that : exchange rates in the long term will
change to reflect the real purchasing power of currencies
- Goods that are globally traded such as:
o Processed food
o Clothes
o Electronic goods
 Should cost roughly similar amounts in different countries once money is
converted into the local currency
- Economies with high inflation should experience a depreciation relative to those economies
with lower inflation rates
- The theory relies on an assumption of free trade and floating exchange rates
- Eg: suppose:
o A price of a bik e is the same in Australia and new Zealand
o And the exchange rate is equal
o Is NZ experiences higher inflation the price of its bikes will rise
o Australian bikes will become more internationally competitive and there will be an
increase in exports to NZ
o NZ consumers will prefer to switch to the cheaper aus substitutes
o Increased demand for Australian bikes will increase demand for the Australian dollar
 causing an appreciation
o As a result aus bikes become less competitive, restoring the purchasing power parity
between the 2 economies
- But this theory does not work perfectly due to a range of local factors
 o Like transport costs
o Taxes and shorter-term influences’ of global financial flows on currencies
- But purchasing power parity is a long term anchor for the exchange rate between different
countries

International competitiveness:

- High inflation results in increased prices for australia’s exports  reducing international
competitiveness  leading to lower volume of exports
o IC = refers to the ability of an economy’s exports to compete on global markets
o An economy may be competitive by selling products of higher quality of lower price
than its competitors
- As price of domestic goods increases  consumers likely switch to import substitutes 
worsens trade deficit
- Low inflation should improve aus’s international competitiveness
- Making price of aus goods and services more attractive to other countries and making local
products more competitive

POLCIES (GENERAL)

Monetary Policy:

- Has played primary role in Australia’s low inflation record sine the early 1990s
- Major tool to reduce inflation in short to medium term
- Attempts to sustain economic growth at a level that does not create inflationary pressures
- Trying to hold inflation between RBA’s 2-3% target
- RBA is able to increase interest rates in the economy through tightening of monetary policy
o Which has effect of dampening consumer and investment spending
o Resulting in lower level of economic activity
o And hence lowers inflation
- Rba has used pre-emptive monetary policy by taking action against inflation before it
emerges as a problem
o Rba aims to increase the interest rates before inflation reaches the top of the target
ban to account for the time lag between policy implementation and effect
- Rba aim to make their use of the monetary policy predictable
o Emphases consistently its intention to use monetary policy primarily to ensure that
inflation remains within its target band
o Has effect of lowering inflationary expectations
o And this further reduces inflation as a problem in the economy

Fiscal Policy:

- Can also play a support role in maintaining low inflation

o In period of rising inflationary pressures  government minimise demand pressures
in the economy and therefore reduce demand pull inflation
- Support low inflation objective by also reducing the need for higher interest rates to combat
an inflation challenge

Microeconomic policies
 - Policies that are aimed at individual industries,, seeking to improve the efficiency and
productivity of producers – also referred to as supply side policies
- Contribute to economy’s long term record of low inflation
- Reduced protection
o Lowered the prices if imports and increase the competion faced by domestic
producers from overseas competitors and new entrants to domestic markets
o Makes it more difficult for domestic producers to increase their prices
- Greater investment in economic infrastructure such as roads, railways and ports can help
avoid transport and other bottlenecks that can increase production costs and add to
inflationary pressures

Labour Market Policies

- Labour market policies are microeconomic policies that are aimed at influencing the
operation and outcomes in the labour market, including the industrial relations policies that
regulate the process of wage determination as well as training, education and job-placement
programs to assist the unemployed
- Labour marketattempts to ensure that increase in wages are linked to productivity
improvements
o If productivity rises the economy will be able to afford real wage increases without
inflationary pressures
o Deregulation of labour market has allowed for wage increases for workers who skills
are in high demand, without leading to large wage rises in other sectors of the
economy
 Helped restrained inflationary pressures

RECENT TRENDS / THEIR CAUSES AND EFFECTS / POLICIES – EFFECTIVENESS AND LIMITATIONS:

PRE-COVID:

DURING COVID:

- Trend (causes and effects):

Cpi declined by 2 percent in the June quarters
o 0.3% ove the year
- The fall in CPI owerd to undually large temportary declines ina few price series
- First decline in year ended CPI inflation since the early 1960s and largest quarterly decline
since 1931
- Child care and coms pre-school serices were free for most of the quarter
- Furl prices also moved sharply lower
- Rents also declined in the quaerer and tenants have obtained sicounts on existing rental
agreement and travel restrictions  increase supply in the longer term rental market
- Strong price increase in some food items and household goods that were in high mdeand
under the social distancing measures
- Government policies reduced administered prices:
o A number of govt polcies announced in sporense of the COVID-19 pandemic affected
prices significantly in the June quarter
o Most notably the introduction of free child care services from June 6 th to July 12th
o A goveremtn subsidy which also covered before and after school services
o Led to a 95% decline in child care prices in the June quarter
 o Pre-school fees waived for term 2 in NSW, vic and qld
o Together thrse policies subrtrated 1.2 pp from healding inflation in the June quarter
o Inflation rebounded in the second hald of 2020 as these subsidies were progressively
removed
- Declin in medical and hospital servies prices in the quarter
o Govt increased bulk billing incentives during the pandemic
o Which reduced health costs
o Private heath insurance premiums have been scheduled by 2.9% in April
 But most priv health insurers deferred the scheduled increase for at least 6
months
- Housing-related inflation slowed sharply in the June quarter.
o Rents declined for the first time in the 45-year period for which quarterly rents data
are available
o The supply of properties available for long term rental has increased since the
outbreak of COVID-19
 the introduction of travel restrictions encouraged some landlords that were
previously supplying short-term holiday accommodation to instead put their
properties on the longer-term rental market.
o State governments have introduced mechanisms to enable tenants who have
become unemployed or lost income due to COVID-19 to negotiate rent reductions.
o rent relief as part of land tax rebate schemes and public housing rent reductions also
contributed to rent price falls in some states in the quarter
- market services inflation remained subdued
o market services include: household services such as hairdressing, as well as financial
service and meals and takeout
o slowed in the June quarter
o social distancing measures resulted in a number of household services and their
respective prices being unavailable for part of all of the June quarter
- some retail prices increased strongly in June quarter
o prices for non durable household goods such as personal hygiene and cleaning
products rose as some supermarkets stopped discounting on the back of increased
demand for these items
o Strong demand alongside the introduction of lockdowns and working from home
measures caused price rises for furniture and household appliances
o prices for clothing and footwear declined sharply as retailers offered significant
discounts early in the quarter in an attempt to drive sales.

Policies:

CURRENT:

- In 2021 the common experience is higher inflation

- CPI indlaiton has increased in most advanced economies
o With a number experiencing headline inflation rates above 4%
- Most central banks have concluded that the increase in inflation is likely to be only
temporary
- Inflation was much stronger in the December quarter of 2021 than was expected at the time
of the November statement
- Inflationary pressures have also broadened a little, with prices picking up for some market
services
- wages growth picked up in September quarter
o returning to the low rate observed in years leading ip to COVID-19 pandemic
o wages gwoth was stronger in those industries where there have been reports of
labour shortages
 notable professional services and construction
 but for most other industries there was little evidence that wages were rises
beyond the relatively subdued rates of growth seen in the years leading up
to the pandemic
 most firms are not anticipating wages growth to move beyond the 2-3%
range over the year ahead

- headline CPI increased by 1.3% in the dec quarter and 3.5% over the tear
- this outcome was higher than the 3.25% annual inflation rate that eas expected at the time
of the November statement
- large price movements in a small number of components accounted for a significant share of
the increase in headline CPI
o price increases for:
 newly constructed dwellings
 consumer durables
 automotive fuel
 which together comprise of around 1/3 of the CPI basket
 and account for around 2/3 increase in the headline CPI in that
quarter
- Measures of underlying inflation remove the effect of irregular or temporary price changes
in the CPI.
o These measures indicate that underlying inflation rose by around 1 per cent in the
quarter and 2.6 per cent over the year
o one of the strongest quarterly outcomes in decades and represents a material
increase in underlying inflation relative to recent years.
- Prices for new dwelling construction:
o Make up just under 1/10 of the CPI basket
o Increased up by 4.2% in the December quarter
o Drive by substantial increase in the prices changes by builders (exclusive of
government subsidies) in most capital cities
- Strong rise in cost of raw materials  increased by 3.8% in the December quarter and 12%
over 2021
o Domestic and global supply shortages have increase prices of timber and steel inputs
o Also increase in new dwelling inflation because fewer government grants were paid
out in December quarter than September quarter
o This account for less than 1/5 of the total increase in dwelling prices
o Number of grants paid is expected to decline over time
  will provide a boost to measured inflation as prices measured in the CPI
converge to the prices charged by builders
- prices also increased strongly for most consumer durable items on the back of ongoing
supply chain distributions at overseas factories, sustained global and domestic demand, and
elevated shipping costs
o over prices of consumer durable increased by 1.5% in dec quarter
o strongest quarterly outcome since 2009 following large depreciation in exchange
rate during GFC
o clothing and footwear prices increased particularly strongly
- inflationary pressures in the market services picked up in the second half of 2021
o market services accounts for a little over 1/5 of the CPI basket
o picked up in second half of 2021 to be 2.4% higher over the year
o The prices of these services are generally driven by domestic factors such as labour
costs and other domestically sourced inputs.
- Fuel prices continued to increase, making a large contribution to headline inflation
o Fuel prices increased by 6.6 per cent in the December quarter, contributing 0.22
percentage points to headline inflation
o Over 2021, fuel prices rose by 32 per cent – the largest annual increase since 1990.
o Fuel prices have increased a little further since the beginning of 2022, and at current
levels would make another positive contribution to quarterly headline inflation in
the March quarter.
- Inflation has picked up significantly and by more than expected
- Although it remains lower than most other advanced economies
- Over the year to the march quarter  headline inflation = 5.1%
o Underlying terms inflation = 3.7%
- Rise in inflation largely relect global factors
- Bust domestic capacity constraints are increasingly playing a role and inflation pressures
have broadened
o With firms more prepared to pass through cost increases to consumers
o Further rise in inflation is expected to decline back towards the target range of 2-3%
 Central forecast for 2022 is for headline inflation of around 6%
 And underling inflation of around 4.75%
 By mid 2024 headline and underlying inflation are forecast to have
moderated to around 3%
 These forecasts are based on further increases in interest rates
- Wage growth has been picking up
o Tight labour market  approaching capacity
o Increasing number of firms are paying higher wages to attract and retain staff 
especially in an environment where the cost of living is rising
o Aggregate wages growth was subdued in 2021 and no higher than pre-pandemic
levels
o More timely evidence shows that larger wage increases are no occurring
- Inflation has been persistently high because many advanced economies are at or close to
full employment, commodity prices have risen sharply and there are ongoing supply
disruptions.

CAUSES:
- Annual CPI inflation increased to 5.1% in 2022 march quarter
o Predominantly due to increase in higher dwelling construction costs + automotive
fuel prices
o Times mean annual inflation that excludes large price rises and falls, increased to
3.7%
 Highest since march 2009
- Rising construction costs drove higher prices for new dwellings
o New dwelling prices recorded at largest rise since September 2000
 Which was following introduction of GST
o Prices rises driven by high levels of building construction activity + ongoing shortages
of materials and labour
o Fewer payments of government construction grants compared to previous quarter
also contributed to rise
 These grants have effect of reducing out reducing out of pocket expenses for
new dwelling purchases
- Fuel prices at record level:
o Automotive fuel prices rose for the 7th consecutive quarter  strongest rise since
the Iraqi invasion of Kuwait in 1990
o The automotive fuel series reached a record level in the March quarter due to an oil
price shock caused by the Russian invasion of Ukraine + ongoing easing of COVID-19
restrictions strengthening global demand
 trade sanctions imposed on Russia
 therefore fuel prices rising is a mix of imported inflation and also increased
demand pull inflation
- food and non-alcoholic beverages group:
o weighted average of 8 capital cities, quarterly movement (%) fo food and non-
alcoholic beverages = 2.8%
o vegetables and fruits rose due to
 COVID-related supply chain disruptions
 High trasnports
 Fertiliser costs
 Flooding in production areas of NSW and QLD also disrupted supply in early
March  additcional pressure on vegetable prices later in quarter
 Meals out and takeaway foods rose 0.7%.
 The pass through of increased input costs to consumers was
partially offset by the NSW Government's 'Dine & Discover' and the
City of Melbourne's 'Midweek Melbourne Money' voucher schemes.
 These voucher schemes have the effect of reducing out of pocket
costs for consumers.
 Excluding the impact of these voucher schemes, meals out and
takeaway foods rose 1.2%.
- Transport group weighted average of capital cities quarterly movement = 4.2%
o Due to increase un automotive fuel by 11% due to oil price shock from Russian
invasion of Ukraine + easing of ongoing COVID restrictions strengthening global
demand
o Motor vehicles rose 1.0% due to ongoing global supply constraints  restricts global
supply chains coupled with strong domestic demand
EFFECTS:

- Price pressures intensifying has an upward pressure of wages

- Upstream price pressure are increasingly being passed on to final consumer prices of many
goods, as supply chain pressures persist and and demand remains strong
- Labour markets conditions are tightest they have been in many years
o Unemployment rate has been steady in march
o But declined over the first quarter as a whole
o Participation rate and employment-to-population ration were both at historical
highs
o High vacancy rates and other leading indicators of labour demand suggest that
employment growth was likely to remain strong over the course of the year
o As a result, the unemployment rate was forecast to decline to around 3½ per cent in
early 2023, a little lower than previously expected, and to remain around this level
for some time. This would be the lowest rate of unemployment in almost half a
century.
- Labour costs rising at a faster pace and are likely to continue
- Firms having difficult hiring workers with the right skills
- Given tight labour market and increase in job mobility – more firms having to pay higher
wages to attract and retain staff
- Labour costs picking up at a faster rate than over the preceding index
- Wage price index forecast to be around 3.75% by the end of the forecast period
o Expected wage-price inflationary spiral
- Significant rise in commodity prices was set tot see the terms of trade peak later and at a
higher level than previously assumed
o Boosting national income
- Economic growth and uncertainty
o
- Wages
- Income distribution
- Unemployment
- International competitiveness
- Exchange rate impacts
- Interest rates
- Benefits of inflation

EXPECTED

- An expected inflation persistence

- Supply chain bottlenecks
o Many lockdown and mobility restrictions have eased now however recent surges in
Omicron had renewed the pressure on some supply chains
o In later stage of pandemic however, may of these bottlenecks have emerged as a
result of strong overall demand from the economic recovery
o Shark increase in relative demand for durable goods, and hoarding and panic buying
o Most sever bottlenecks affect:
 Raw materials
 Intermediate manufactured goods
 Freight transport
- Shift in demand towards goods and away from services
o Pandemic brought about an initial significant shift in what consumers buy 
spending on goods rose dramatically
o Therefore much of the rise in inflation in near term reflected inflation in durable
goods
 Such as used cars
o shift in demand towards goods and away from services may persist given how the
pandemic has reshaped society
- Aggregate stimulus and post-pandemic recovery
o Find aus numbers
o But abouto $16.9 trillion in fiscal measures was announced globally to fight the
pandemic
 With relatively larger support in advanced economies
o a large fiscal stimulus combined with lossening monetary policy staces, higher and
persistent inflation is bound to come as aggregate demand will be stimulated 
demand pull inflation
o households are expected to be running down the savings they accumulazted easlier
in the pandemic
 surge in aggregate demand
 stronger than expected economic recovery also driving this
- shock to labour supply
o labour market disruptions from the pandemic continue even two years after it began
o research on aus
- supply shocks to energy and food because of russain invasion of Ukraine
o invasions has led to rise in energy and food prices  inevitably high inflation globally
o both russia and ukrain are exporters of major commodities, and disruptions from the
war and sanctions have caused global prices to soar
 especially for oil and natural gas
o food prices have also jumped
 wheat price are at record high
 Ukraine and Russia account for 30% of global wheat exports
o Effects lead inflation to persist longer than expected
 - Duration of the current inflation episode will depend:
o on the interplay between the persistence of labour market tightness and supply
chain bottlenecks an central bank responses
o duration of the war in Ukraine and its impact on energy prices, food prices and
global growth
- expected that we will not experience an out-of-control surge in inflation beyond a couple of
years into he future
- but central banks dislike for inflation may be suppressed given the long term impact of the
pandemic and the uncertainty about the recovery
o and temptation to inflate away high debt burdens globally

Policies during covid:

- when times get tough, macro dominates micro

- policy focus should be on getting demand stimulus out there
- but here, the supply side is an important enabler of the recovery sine the supply side of the
economy was affected as drastically as the levels of aggregate demand
- therefore micro policy was important since:
- covid pandemic is a reallocation shock
o some industries wont come back for a while
o enduring changes in consumer and business preferences – possibly in sectors like
travel, retail, office accommodation and aviation
o
MICROECONOMIC

2021

FISCAL (MAKE NOTES AND REFINE THROUGH THIS ARTICLE)

 At the Commonwealth level, fiscal stimulus, consisting of expenditure and revenue measures
worth A$312 billion (15¾ percent of 2020 GDP), has been put in place through FY2025.

 Nearly two-thirds of the stimulus is set to expire by end-FY2021 (June 2021), including a
flagship JobKeeper wage subsidy program which disbursed estimated payments of A$89
billion (4.5 percent of 2020 GDP) through end-March 2021.

 The stimulus includes the health response package, amounting to A$20 billion (1.0 percent
of GDP), to secure access to COVID-19 vaccines, roll out a national Vaccination Program,
strengthen the health system, protect vulnerable people, including those in aged care, from
the outbreak of COVID-19, and provide financial support to the States and the Territories.
Major developments at the Commonwealth level include:

o On May 11, 2021, the Commonwealth government revealed the FY2022 budget,
with additional stimulus measures of A$48.4 billion (2.5 percent of GDP) through
FY2025, including additional tax reliefs for low-and middle-income earners,
extending temporary full expensing and loss carry-backs for businesses, and adding
spending on infrastructure investment and training programs. Separately, the new
budget adds significant social spending over FY2022-25, including for aged-care (0.9
percent of GDP) and disability programs (0.7 percent of GDP), as well as various
programs to support women, including for their safety, education, health, and
retirement. It also invests A$1.6 billion to fund priority low emissions technologies.
o On December 17,2020, the government released its Mid-Year Economic and Fiscal
Outlook (MYEFO), and introduced additional funding (A$7 billion, 0.4 percent of
GDP) to strengthen the national vaccination program and extend the Coronavirus
Supplement and other income support measures for another three months through
end-March 2021.
o On October 6, 2020, the FY2021 Budget unveiled an additional stimulus package
(A$98.2 billion, or 5 percent of GDP). It included a new JobMaker program (A$73
billion), comprising new measures (such as loss carry-backs and a personal income
tax cut), as well as the extension of existing measures (the temporary Coronavirus
Supplement, other income support measures, full expensing, and infrastructure
investment, among others). Separately, the budget showed the government's
commitment to invest in green technologies (A$1.9 billion) to lower emissions.
o On July 23, 2020, the government released an update to Australia's Economic and
Fiscal Outlook. The July update revised the cost estimate of the JobKeeper wage
subsidy program to A$85.7 billion (down from A$130 billion), including an extension
of the program at a tapered level for six months through end-March 2021. The July
update introduced a new JobTrainer Skills package (a training program for job
seekers), and additional health support to boost the testing capacity.
o In March 2020, the government unveiled a series of economic and health packages,
amounting to A$217.1 billion (11 percent of GDP) through FY2024. The first round of
stimulus measures, announced on March 12, amounted to A$17.6 billion and
included a one-off stimulus payment to welfare recipients, accelerated depreciation
 deductions, expansion of applicable eligibility criteria for instant asset write-offs,
cash flow assistance for businesses, and financial support (including tax and fee
waivers) to sectors, regions, and communities disproportionately affected by the
pandemic. On March 22, a second rescue package (A$66 billion) was announced,
including the Coronavirus Supplement (a top-up payment to JobSeeker
unemployment benefits and welfare recipients) and additional economic support for
households and businesses. On March 30, a landmark JobKeeper wage subsidy
program (A$130 billion) was introduced to help Australians maintain their jobs.

Other measures include an allocation of up to A$15 billion to invest in asset backed

securities to help funding for small banks and non-bank financial institutions, and A$20
billion for loan guarantees between the Commonwealth government and participating banks
to cover the immediate cash flow needs of SMEs. The latter scheme has been extended
twice (initially through June 2021 and then through end-December 2021). In March 2021,
the government renamed it the SME Recovery Loan Scheme, under which the government
guarantees 80 percent (previously: 50 percent) of new SME loan amounts (starting April
2021), with the maximum loan size raised to A$5 million and the maximum maturity
extended to ten years. The scheme also offers up to 24 months of repayment holidays.

State and Territory governments also announced fiscal stimulus packages, together
amounting to A$50 billion (2.5 percent of GDP), including payroll tax relief for businesses
and relief for households, such as discount utility bills, cash payments to vulnerable
households, support for health spending, construction, infrastructure packages, and green
investment (renewable energy and technologies).
MONETARY AND MACRO-FINANCIAL

 Overnight Cash Rate target was cut to 0.25 percent in March 2020 and further reduced to
0.1 percent in November 2020. The interest rate on commercial banks' exchange settlement
balances at the RBA was reduced to zero.

 During the initial phase of the pandemic, to ensure market liquidity, the RBA conducted
longer-term repos and broadened the range of eligible collateral for open market operations
to include investment-grade securities issued by non-bank corporations

 On June 1, 2021, the RBA kept the cash rate target (0.1 percent) and the 3-year government
bond yield target (0.1 percent) as well as the parameters of the Term Funding Facility
unchanged. The RBA also reiterated that the conditions required for a cash rate hike are not
expected to be met until 2024 at the earliest. The Term Funding Facility, which is set to
expire on June 30, 2021, will not be extended.

- The monetary policy lacked effectiveness however in helping keep inflation in its target band
during this time
o Due to its limitation of being unable to lower the policy interest rate corridor any
more
o Inflation did end up rising, however as a result of other exogenous shocks to the
economy
o Monetary policy therefore had to actually take a backseat in the policy mix, contrary
to usual, as most of the process of recovery was done with the fiscal policy and
discretionary changes to the budget and microeconomic reforms which were able to
target the supply side issues with the pandemic which the monetary policy is unable
to.
2022 POLICIES
MONETARY POLICY:

- The strong recovery in global demand, ongoing disruptions to global supply chains and
increases in commodity prices following Russia's invasion of Ukraine had contributed to
inflation significantly exceeding earlier forecasts and being well above central banks' targets.
As a result, central banks had hastened the pace at which they were withdrawing policy
accommodation.
- Inflation in the March quarter had increased substantially and was above the target range of
2 to 3 per cent.
o Although the rise in inflation largely reflected global factors, members noted that
strong domestic demand and capacity constraints were also playing a role. This was
evident in the broadening of inflationary pressures, with firms more prepared to
pass through cost increases to consumer prices.
o Inflation was expected to increase further in the near term but decline back towards
the top of the target range by mid-2024 as supply-side disruptions are resolved.
These forecasts were based on a technical assumption of the cash rate increasing to
around 1¾ per cent by the end of 2022 and around 2½ per cent by the end of 2023.
- Members agreed that the condition the Board had set to increase the cash rate had been
met. They also agreed that further increases in interest rates would likely be required to
ensure that inflation in Australia returns to the target over time. In making its decisions, the
Board agreed that it will continue to be guided by the evidence on both inflation and the
labour market, while noting that significant uncertainties remain.
- Domestically there is uncertainty abut how household spending would respond to the
erosion of real wages
o Since wages have not kept pace with consumer prices
o No contemporary experience as to how labour costs and prices would behave at an
unemployment rate below 4%
o Given the high level of household debt and significant increases in financial buffers
over the preceding couple of years it also needs to be considered how households
will respond to rising interest rates
- Plan to increase the cash rate by 25 to 35 basis points
o A movement of this size would help signal that the Board was now returning to
normal operating procedures after the extraordinary period of the pandemic
o And to increase the interest rate on Exchange Settlement balances from zero
percent to 25 basis points
- Overall working to increase the cost of borrowing and aims to reduce the level of aggregate
demand in the economy in order to dampen the level of demand pull inflation seen by the
economy and bring the inflation rate back into the 2-3% target band from its current
position at the high 5.1%

FISCAL POLICY / MICROECONOMIC REFORMS

- Delivering cost of living relief for Australians and supporting small businesses is a key
outcome of the 2022-23 budget
- Temporary fuel excise relief
o The Russian invasion of Ukraine has seen fuel prices increase, adding to cost of living
pressures faced by families and the cost of doing business for small businesses.
o Therefore reducing fuel excise by 50% for the next 6 months
o excise on petrol and diesel cut from 44.2 cents per litre to 22.1 cents per litre
- more affordable child care

o The Government has invested $62 billion since 2013, with a record $10.3 billion
forecast to be spent in 2021-22.

o This investment is in addition to the $1.7 billion provided in last year’s Budget to

make child care more affordable for families through the removal of the annual cap
on the Child Care Subsidy and increased subsidies for second and subsequent
children.

 This is improving cost of living pressures for around 250,000 families, saving
them on average, around $2,260 per year, depending on their household
income and the number of children in child care.

 Since the phase out of free child care helped significantly contribute to the
low inflation during the COVID pandemic and contributed to the big spike in
the rise in inflation in the recent quarters  therefore it can be expected
that this will be effective in reducing the cost of living for consumers
- Deregulation of the financial market
o Has contributed to the low levels of underlying and headline in australia for the last
40 years prior to the COVID-19 pandemic
o Inflation levels have generally been maintained in the target band of 2-3% during
this time
o Main features include:
 Floating of the Australian dollar
 Removal of barriers to foreign banks entering Australia
 Inflation targeting framework of Mundell-Fleming
 If exchange rate is made flexible then a country is able to pursue an
independent monetary policy
o Effectiveness:
 Greater competition in financial markets  lower pries for consumer and
businesses to access finance
 Increased technical efficiency
 Operating costs as percentage of total average cost fell from 4.2% to
2.9% between 1980-95
 Increased allocative efficiency to capital resources due to increased
competition
-