Economic Inflation In Australia Essay Research Paper

ECONOMIC OBJECTIVES – INFLATION

Inflation is a rise in the general level of prices of commodities. Inflation is a major economic issue in Australia, and is one which requires stable management for durable and long-term improvements. Low inflation and steady economic growth; have emerged as outstanding economic achievements this decade. Along with unemployment, economic growth and external viability; inflation acts a major economic indicator, illustrating the strength and stability of our economy. It is for this reason that inflation management has played such a great role in domestic economic policy over the last decade.

Inflation at present is the focal point of the Australian economy. Inflation is at an unprecedented low, which has acted to keep the Australian economy competitive. Economic policy in Australia has acted to keep inflation low, which has been a traditional problem for decades. At present Australia’s, underlying inflation rate is less than 1.3%, which has opened up a stronger, more competitive export market. With such a pleasing outcome for inflation, Australia can reap the rewards through lower interest rates as well as economic growth, and job increases. Low inflation does more than simply slow price increases; it acts as an expansionary booster to the economy and a stimulus for other economic objectives.

In recent times, low inflation levels have characterised the Australian economy. The underlying inflation rate was only 1.1% to June 1999, and this has meant further stability of prices and continued growth. This result has come on the back of Australia’s “Inflation Target”, set by the Reserve Bank (RBA) in 1993. This has acted as a guide to spending and domestic monetary policy, over the course of the economic cycle. The RBA has set an underlying inflation target of 2-3% per year, and this has contributed to our steady inflation performance. In the late 1990s, Australia has operated at the lower level of this target, and this has pleased the government and the RBA through their initiative. Inflation figures of fewer than 2% annually are testament to this. Recent trends have given Australia one of lowest underlying inflation rates in the OECD group, which includes many highly industrialised nations.

Over this century Australia, has seen both high and low inflation. In the 1950s, 1960s and early 1970s we experienced periods like today. Yet we faced high levels in the 1970s and 1980s. These were due to the great peaks and falls in the economic cycle, brought on by recessions and boom periods. The Australian economy has developed by adapting to changes in the economic cycle, and flattening out the large “bumps”. Causes of inflation are varied in both their diversity and severity. They include excess demand, where high aggregate demand for commodities forces prices upwards. There is also cost-push inflation, where an increase in the cost of production promotes an increase in the price of goods for consumers. Inflation can also be brought about through inflationary expectations, hence the quote “Inflation breeds inflation”, as well as currency depreciation, which also damages exports. The numerous causes of inflation give testament to the fact that it is a difficult problem to combat. Increased levels of inflation also cause many changes in the economy.

There are essentially three main negative aspects of high inflation. It acts by reallocating resources in the economy, usually by encouraging speculative investment. It also causes redistribution of wealth from those who hold cash funds, as opposed to property or capital. Thirdly, it causes decreased levels of international competitiveness. Conversely, there are many positive aspects of low inflation.

Australia has gained through lower interest rates, high but steady economic growth and the promise of job creation in the future. Low inflation has bred a more confident economy, one which is wiser for the adversity it has faced through recessions of the past. Low inflation creates a more externally viable economy, and allows competitive export growth.

Australia’s current low level of inflation can be attributed to an array of factors. These have included the lagging effects of the recession earlier this decade, as well as the implementation of a number of recent economic policies.

Current low levels of inflation are the product, of three main policy initiatives. First and foremost, Monetary policy has helped our inflation by keeping spending in check. Through interest rates, and the adoption of an inflation target, the RBA has been able to artificially control the level of economic activity in Australia. Monetary policy has been a favoured government option, and it has proven a success. Secondly, micro-economic reform has played a major role in keeping inflation low. It is essentially based on efficiency and productivity in the Australian industries, where it has aimed to help firms lower costs, thereby creating a stable economy based upon strong and efficient production, healthy exports and generally more economically sound industries. This decade it has included moves for a national competition policy, deregulation of industries as well as general moves for efficiency. Fiscal policy is the third policy option. It surrounds government spending and taxation initiatives. In recent times it has acted in a contractionary manner, including budget surpluses and the repayment of foreign debt, which have allowed for more expansionary monetary policy.

Some feel that currency policies aren’t doing all they could. While drives for efficiency are a step in the right direction, it is clear that monetary policy could be eased to benefit other economic objectives. Being below the RBA target for inflation should allow Australia to lower interest rates. These could help economic growth and achieve greater job expansion. This could easily be achieved if the government would diversify its one-eyed monetary policy. The coalition must begin to realise that low inflation is coming at the expense of other, equally important economic objectives. While tight fiscal policy may be paying off foreign debt, we are still faced with high unemployment and unfavorable CAD terms. It is clear that while inflation is at a low level now, we must turn more attention to other pressing economic objectives.

Inflation is a major economic management issue, and is one which requires great vigilance and perseverance for durable improvements. Though through the efforts of the RBA and the current government, inflation has fell to an unprecedented low, via much agony and policy deliberation. At present inflation has been brought back to earth through monetary and micro-economic policy essentially. Yet the pressing issue is not how far we can go with inflation, but how much can it’s current level benefit our other major management issues.