Headline inflation rise hides continued sluggishness

The Australian CPI figure released yesterday showed a significant jump in inflation, and for some this was great news s at least inflation headed back towards the target range of the Reserve Bank of Australia (RBA). This is almost certainly a false hope.

Looking at the figures it is clear that the massive rise in fruit and vegetable prices, largely due to massive flooding affecting supply, has made the CPI figure look more healthy than it really is. Take that out and the underlying rate of inflation actually fell.

Australia's headline and underlying inflation compared

The low inflation figures show that economic growth the Australian economy continues to slow down, and this is not good news. The end of the mining boom is severely affecting WA and the Northern Territory, but indicators don't show massive growth in the rest of Australia that will compensate.

Once again Greg Jericho in The Guardian provides excellent analysis and data of the inflation figures and considers the likely impact on monetary policy settings.

The Guardian article is here

VCE students are especially urged to understand the pressures in the economy at present - demand side pressures on policy settings. The article makes use of the Australian underlying inflation measures which are required knowledge.

IB students can use this as an example of inflation and monetary policy. The article is particularly strong at looking at how the various factors link together to give an overview of the health of the economy and the process and implementation of monetary policy.