Inflation
1 Definition
Inflation is an economic term that refers
to the general increase in prices of goods
and services over time. It means that, on
average, the cost of buying goods and
services goes up.
2 Measurement in Australia
Inflation in Australia is traditionally
measured by the Consumer Price Index
(CPI). This index is calculated every
quarter by the Australian Bureau of
Statistics (ABS).
What is inflation and what causes it?
Watch the following video and make notes of the following

YouTube
What is Inflation?
Economists constantly refer to inflation and tend to
suggest it is a Very Bad Thing. But why exactly, where do…
08:01
Definition of inflation

Causes of Demand-Pull Inflation

Causes of Cost-Push Inflation

Cost-Push Inflation (Supply side)
An increase in wages paid to employees An increase in interest rates

Wages are often the main cost for a producer and This raises the producer’s cost of finance and
rising wages represent a large cost increase, which is borrowing. These costs are usually passed on to
passed on to consumers. consumers.

An increase in government taxes, oil prices An increase in the cost of raw materials
and prices for utilities
One-off supply-side shocks due to a one-off event can

(such as electricity, gas and water services). These cause this. An example may be a severe storm that

costs are outside the control of the producer and are negatively affects the yield of a crop, such as ex-

also usually passed on to consumers.
Tropical Cyclone Mangga, which hit mid-west region
of Western Australia in 2020 and wiped out much of
the cucumber crop for that year. The price of
cucumber and cucumber-based products rose as the
supply had decreased.

Australia’s trading partners experiencing a period of inflation

Many component parts are imported so, if our trading partners are experiencing inflation, that inflation may be
passed on to Australian producers and suppliers, who then pass the cost on to consumers.
Demand-Pull Inflation (Demand
side)
These factors cause an increase in demand that exceeds the current level of goods and services.

An increase in consumer An increase in business An increase in income

optimism about the future confidence If consumers have a higher

Consumers are encouraged to This can lead businesses to spend income — either through wage

spend more money because they and invest in new assets, hire increases determined by the

don’t see a need to save for ‘a more employees or replace old government or through a

rainy day’. equipment. reduction in income tax imposed

by the government — they are
likely to increase their spending
on goods and services.

For example, almost 2.75 million

Australians will receive a pay
rise of 5.75% from 1 July 2023
after the Fair Work Commission
announced its decision for those
on minimum and award wages.

An increase in our exports

If the economies of our major trading partners are performing well and they are experiencing good economic growth,
they may increase their demand for our goods and services.
How is inflation measured?
Read the following document and provide responses to the questions below in your Google docs.

https://www.rba.gov.au/education/resources/explainers/pdf/inflation-and-its-
measurement.pdf?v=2023-06-07-09-12-52

1. What is the Consumer Price Index (CPI), and how is it calculated in Australia?

2. How does the Australian Bureau of Statistics (ABS) collect prices to calculate the CPI?

3. How is the CPI basket chosen, and what factors determine the weights of items in the basket?

4. What is underlying inflation, and why is it important to consider?

5. What are some limitations of the CPI as a measure of price changes?

6. Explain the concept of substitution bias and its impact on the CPI.

7. Why does the CPI not include new products immediately when they appear on the market?
Brainstorm activity: What are some
of the impacts of High Inflation?
Create a mindmap on the blank paper provided and use your knowledge from previous lesson.

Hint: income distribution, economic growth, overseas competition, unemployment

Extension Task
Inflation target, consequences of inflation, and RBA's
response to inflation
Read the following article and provide responses to the questions below on your Google Docs.

Reserve Bank of Australia

Australia's Inflation Target | Explainer | Education
This series provides short, concise explanations for various
economics topics.

1. What is the inflation target in Australia?

2. Why does the Reserve Bank target inflation?

3. What are the consequences of high inflation?

4. What are the consequences of low inflation?

5. How does the Reserve Bank adjust monetary policy in response to inflation?

6. Why is the inflation target set at 2 to 3 percent?