introduction:

Inflation is defined as a sustained increase in the general level of prices for

goods and services. It is measured as an annual percentage increase. As
inflation rises, every dollar you own buys a smaller percentage of a good or
service.
The value of a dollar does not stay constant when there is inflation. The value of
a dollar is observed in terms of purchasing power, which is the real, tangible
goods that money can buy. When inflation goes up, there is a decline in the
purchasing power of money. For example, if the inflation rate is 2% annually,
then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your
dollar can't buy the same goods it could beforehand.
There are several variations on inflation:

Deflation is when the general level of prices is falling. This is the opposite
of inflation.

Hyperinflation is unusually rapid inflation. In extreme cases, this can lead

to the breakdown of a nation's monetary system. One of the most notable
examples of hyperinflation occurred in Germany in 1923, when prices rose
2,500% in one month!

Stagflation is the combination of high unemployment and economic

stagnation with inflation. This happened in industrialized countries during
the 1970s, when a bad economy was combined with OPEC raising oil
prices

In recent years, most developed countries have attempted to sustain an inflation

rate of 2-3%.

Causes of Inflation
Economists wake up in the morning hoping for a chance to debate the causes of
inflation. There is no one cause that's universally agreed upon, but at least two
theories are generally accepted:
Demand-Pull Inflation - This theory can be summarized as "too much money
chasing too few goods". In other words, if demand is growing faster than supply,
prices will increase. This usually occurs in growing economies.
Cost-Push Inflation - When companies' costs go up, they need to increase prices
to maintain their profit margins. Increased costs can include things such as
wages, taxes, or increased costs of imports.

Inflation: a publci enemy

THE Reserve Bank wants us on alert: interest rates will probably need to
rise further from here. The Gillard government wants us to know
something, too: higher interest rates are not its fault. Both messages are
correct.
While painful for households and businesses with loans, higher interest
rates are the prudent policy response to emerging price pressures in an
economy operating at close to full capacity. Now is not the time to go
forgetting the hard-earned lessons of the 1970s period of ''stagflation'':
that high inflation, not high interest rates, are economic public enemy
No.1. Nothing erodes living standards like higher prices which eat into
wages and leave families struggling to get by on the same income.
The global outbreak of inflation in the 1970s was caused by shortages of
oil and other energy resources that led to a period of ''cost-push'' inflation.
Today the risk is of ''demand-pull'' inflation, where a period of too-strong
demand leads to prices being bid upwards. Voracious demand by the
developing economies of China and India for mineral resources has
pushed commodity prices to record highs and has produced, arguably,
Australia's biggest external income shock.
This mining boom is testing the capacity of the Australian economy. There
are only so many workers and so much equipment available to fill orders

from foreign buyers. Meanwhile, turbocharged investment plans by mining

companies are drawing away resources from the rest of the economy.
Businesses across the country are on the brink of having to engage in a
wages war to attract a dwindling supply of skilled workers. And wages
pressure spells inflation pressure.
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The Gillard government, we believe, is doing its part to help cool such
inflation pressure by withdrawing its fiscal stimulus and returning the
budget to surplus in 2012-13. Any heat the government can take out of
the economy, for example through cuts to welfare payments to upperincome families, means less work for the Reserve Bank to do to clamp
down on demand pressure. But there are limits to this argument.
Theoretically, the government could stop spending altogether and this
would help to keep interest rates low; probably because the loss of public
sector jobs would plunge us into recession. As the Treasury secretary,
Martin Parkinson, pointed out this week: to cut spending severely would
be to risk an economic slowdown that would jeopardise the recovery in
government revenue already in place. Managing this boom will require
both hands of economic policymaking - fiscal and monetary - pulling on
the levers of restraint.

Uni numbers a cause for cheer

EVERY now and then a rise in the expenditure columns of the government
ledger deserves a collective ''hooray'', even though it means spending
billions of tax dollars more. University enrolments are expected to exceed
500,000 next year, costing government $3 billion more than suggested by
the spending pattern between 2001 and 2007.
Funding for teaching, learning and research will rise to $13 billion, an
increase of nearly two-thirds on 2007 funding of $8 billion. The upside is
that the nation should be repaid many times over. In 2008, enrolments
totalled 400,000.
Pushing up the cost is a jump in student numbers engineered by the
freeing of universities to enrol as many eligible domestic students as they
see fit. Enrolments of foreign students already are uncapped and
government domestic quotas this year were slightly relaxed to prepare for
next year's open gate.
The change was recommended by the 2008 Bradley review to get
Australian university enrolments out of the doldrums. In 1996, 16 per cent
of Australians aged 25 to 34 were university graduates; in 2006, this had
risen to 29 per cent. But Australia's ranking among OECD nations slipped
from seventh to ninth because other countries, including New Zealand,
improved faster.

The government's target of 40 per cent by 2025 is intended to restore

Australia's standing to the high-performing end of the OECD table. But in
contests of international competitiveness, nothing is assured.
Education is universally recognised as a key to wealth creation, to the
future-proofing of an economy (like Australia's) through diversity and
resilience, and to the esteem of individuals who pursue it. Education
investment is a rare tool of government in that it serves the common good
as equally as it does individual aspiration.
This is not some feelgood notion.
Economic good fortune is a blessing. Ask the inhabitants of impoverished
nations whether they would prefer the living conditions afforded by
Australia's mineral wealth, for instance. But comfort can induce a certain
indifference to the challenges of staying ahead of the field or, in
Australia's case, of taking insurance against a sudden fall in demand for
mineral exports.
What an earlier generation found adequate may no longer suffice. The
world has changed immeasurably, as has Australia's place in it. Jogging
without sweat won't keep us in the race.
''If a man neglects education, he walks lame to the end of his life,'' wrote
Plato. In this case, what is true for the individual is true for the nation, and
vice versa.