Unit 1
Unit 2
Inflation
Households
Over 60% of all spending in Australia each year is by households. Changes in prices will have an enormous impact on the way that households choose to spend the money that they have.
The most important impact of high inflation on households is on our spending power. Imagine a situation in which your wage stays the same from one year to the next, but inflation is 5%. What would this mean for your standard of living?
The short term impact is that one of two things would happen. If you were previously able to save some money, the change in the general price level would mean that you are no longer able to save as much money. On the other hand, if you were already spending all of the money that you received, then inflation of 5% would mean that you have to stop buying some of the things that you buy.
In either case, what we have seen is known as a change in your real wage. Your nominal wage is the actual amount of money you receive. A far more important statistic is your real wage. To get this figure, economists will take your real wage and adjust it for the rate of inflation. Consider this example: If your employer offered you a 10% pay increase, would you be happy? The answer is that if the rate of inflation is 2%, then you would be very happy! As a result of the change in your wage you would be able to buy more goods and services, and therefore your standard of living would increase. On the other hand if the rate of inflation was 15% then a pay increase of 10% wouldn’t be enough. Despite the fact that you would be receiving more money, you wouldn’t be able to buy as many goods and services. This examples proves one key point – when you are thinking about changes to your wage, you must first stop to consider the prevailing rate of inflation.
We can also examine the impact of price changes in different sectors of the economy.
In recent years more and more people have decided to purchase large, flat screen televisions. You might argue that this change has been because of the available technology, but the truth is much simpler; televisions are cheaper today than they were ten years ago. In fact, this is true of most technical items; today people tend to buy better mobile phones, cameras and MP3 music players. The increased investment in this area, the availability of inexpensive labour (particularly throughout Asia) and competition in the sector have all helped to ensure that over the last ten years prices for these items have fallen.
On the other hand, the prices of some grocery items have increased. If you want to buy the ingredients for a fruit salad, it is more expensive today than it was five years ago. This is partly because of prevailing weather conditions, changing water allocations from rivers, the spread of housing and a lack of investment in the farming sector. When people can’t afford to buy one type of food, they will seek out an alternative. In this case, the decline in the overall quantity of fresh food that is bought and sold has been matched by an increase in spending on pre-packaged processed food. This is particularly true for people who live in low socio-economic areas. As you can imagine, there is a very real possibility that these changes will have a long term impact on health, physical development and even life expectancy!
In other words, controlling inflation is very important. If we start spending more money buying electronic gadgets, and as a result we spend less money on healthy food, the potential exists for some very serious long term problems.
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