Unit 1
Unit 2
Inflation
Although the government is generally concerned with a large number of economic problems at any one time, the one that appears in the newspapers most frequently is inflation. Given the significance that is attached to inflation, it is important that you have a strong understanding of this concept as your study of Economics progresses.
Think back to when you first started secondary school. If you visited your school’s tuckshop in that year, you might remember some of the prices. The odds are that if you purchase the same items today you will be paying much more for them. If you ask your parents or your teacher what they paid for that item when they were at school, the difference would be even greater. In simple terms, this is inflation.
Inflation can be defined as an increase in the general price level from one year to the next. It is worth taking a moment to consider each of the key words in this definition:
Increase: If the general price level falls (which is very rare), we refer to this as deflation. For inflation to occur, the general price level must be increasing.
General: The measure of inflation examines changes to many prices, not just one or two. If the price of a tomato increases, we don’t refer to this as inflation; the overall price level must increase before inflation will be recorded.
Price: Inflation is a measure of changes in price. It doesn’t matter how many items we buy, nor the location from which we buy them. In this case the only variable that we are assessing is a change in price.
Over recent years we have seen that the Australian government and the Reserve Bank have been particularly successful at controlling the rate of inflation in this country. In the 1980s the average rate of inflation was close to 8% per annum. In 1996 the government changed the law so that the RBA would act to control the rate of inflation, and since that time the average rate has been around 2.5% per annum. As you will soon see, this can have an enormous impact on the way in which all of the participants in the market act; low inflation encourages positive economic activity, long term growth and job creation. This is a very big part of the reason that the Australian economy has been so strong since that time.
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