Inflation higher

The latest inflation figure was released yesterday. This is another key variable you must follow for VCE.

For those who are new to Economics a few points of clarification.

Inflation is defined as 'a continuous rise in the general price level leading to a decline in the purchasing power of money'.

Australia only reports inflation once every three months (very unusual in world terms where usually monthly figures are reported). When reported the emphasis tends to be on how much prices rose in the three month period, for example in the latest quarter prices rose by 0.8%. But we need to focus on the annual rate - how much prices rose in the last twelve months. In this case it is 2.7%.

The figures show that annual inflation rose from 2.2% to 2.7%. This is a substantial jump, but within the target range for inflation of the Reserve Bank of Australia. However, if this jump in inflation is part of a new trend, such a move would be worrying. The chart below shows Australian headline inflation since 2008.

Looking at the figures it would appear that recently inflation over the period has settled into a stable level of 2 to 3%. We cannot tell yet if this isa new trend to higher inflation (as can be seen in earlier years), the next set of figures in April will help us to decide.

There are, however, good reasons to say we are simply observing a 'one-off' change in prices due to the weakening of the Australian dollar. The Age article below provides excellent information on this and the different measures of inflation (which we will deal with later in the course). 

The falling dollar makes imported goods more expensive and this feeds into inflation really quite quickly. However once the dollar has fallen the price of imports do not rise again, there is no 'continuous rise in the price level' which is what concerns us with inflation.

The Age article is excellent and really needs to be read. The link is here.