Analysis Of Inflation (Based On Australia)

3524 words - 14 pages

Inflation can be defined as a "sustained increase in the general level of prices in an economy." Like unemployment, inflation is a major issue in economics, closely related to the fluctuating level of economic activity in a region. In Australia, the Reserve Bank of Australia (RBA) attempts to keep the inflation rate in the targeted range of between 2% and 3%.Economists generally recognise four main causes of inflation: demand, cost, imported and inflationary expectations. In Australia, the average annual rate of inflation in the past 40 years has been at 5.9%, where a good purchased in 1966 for one Australian dollar will now cost ten times as much ($1 $9.94 - measured using the Consumer Price Index (CPI) method).MEASURING INFLATIONThere are many measures of inflation, depending on which basket of goods and services are used as the basis for comparison. In Australia, the best known and most widely used measure is the Consumer Price Index (CPI).Consumer Price IndexThe CIP is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers; and therefore reflect changes in the cost of living (thus considered by some a cost-of-living index). The measure allows an evaluation of the inflation in an economy, and includes a basket of products & services such as food, alcohol and tobacco, clothing and footwear, housing, health, transport, communication, recreation and education. Not all goods and services are included, but a wide selection is covered to reflect average household spending patterns and a good indication of the overall movement of prices and in the cost of living.The inflation rate can be calculated using the following equation:Inflation rate (%)=(Current CPI Index-Previous CPI Index)/(Previous CPI Index) × 100/1Similar to New Zealand, Australia's Bureau of Statistics (ABS) calculates and publishes the CPI quarterly (every 3 months).The table below outlines the 2006 weighting of main expenditure groups in the CPI basket in Australia- source of data: Australia in the Global Economy textbook. Original source: ABS catalogue No 6440.Expenditure GroupWeighting FactorHousing19.75Food17.72Transportation15.25Recreation12.29Household furnishing, supplies and services8.09Alcohol and tobacco7.41Clothing and footwear5.19Health4.69Miscellaneous4.04Communication2.88Education2.69It can be clearly assumed that the dominant determinants of Australia's inflation are the industries of housing, food, transportation and recreation respectively. This also means that inflation will have significant impact on those sectors of the Australian economy. Australia's CPI is very similar to other developed nations. Below is a table representing the Canadian CPI weighing index on April 2006. Source: Canadian Bureau of Statistics (CBS).Expenditure GroupWeighting FactorHousing26.75Transportation19.79Food16.89Recreation11.96Household furnishing, supplies and services10.58Clothing and...

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