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  • Writer's pictureSteven Feng

The inflation solution

Current Australia Inflation

The annual inflation rate in Australia surged to 5.1% in Q1 of 2022 from 3.5% in Q4, surpassing market estimates of 4.6% and marking the highest reading since the introduction of the Goods and Services Tax in the early 2000s, reflecting soaring fuel prices and surging building cost. Transport prices rose the most since the 1990 Iraqi invasion of Kuwait (13.7% vs 12.5% in Q4), while additional upward pressures came from cost of food and non-alcoholic beverages (4.3% vs 1.9%), alcohol & tobacco (1.8% vs 1.1%), housing (6.7% vs 4%), furnishings (4.9% vs 3.6%), recreation (3% vs 2.1%), health (3.5% vs 3.3%), and insurance & financial services (2.7% vs 2.2%). On a quarterly basis, consumer prices went up 2.1%, the most since Q3 2000, after a 1.3% gain in Q4, mainly due to a jump in cost of new dwellings and fuel. The RBA Trimmed Mean CPI rose by 3.7% yoy, the fastest pace in 12 years, exceeding the midpoint of the central bank’s 2-3% target. Quarter-on-quarter, the index increased 1.4%.

(source: Australia Bureau of Statistics)

Inflation Target

The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over time. With this rate of inflation it may not cause significant distort for economic decisions in the local community.

The inflation target is defined as a medium-term average rather than as a rate (or band of rates) that must be held at all times. This formulation allows for the inevitable uncertainties that are involved in forecasting, and lags in the effects of monetary policy on the economy. Experience in Australia and elsewhere has shown that inflation is difficult to fine-tune within a narrow band. The inflation target is also, necessarily, forward-looking. This approach allows a role for monetary policy in dampening the fluctuations in output over the course of the cycle. When aggregate demand in the economy is weak, for example, inflationary pressures are likely to be diminishing and monetary policy can be eased, which will give a short-term stimulus to economic activity.

(refer to Reserve Bank of Australia)

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