Effects of Inflation

puffiness is defined as a sustained increase in the general level of expenses which moments in a decline in the secureing power of money. pretentiousness is measured through the Consumer damage Index (CPI) which measures proportional changes in harms in a re set upative basket of gns, burthen according to their importance in a regular Australian households budget. The RBA aims to keep lump at an yearly rate of 2-3%, and in order to do this a number of policies ar available for the Australian government.Keeping Inflation under control is a primary solicitude for the Australian Government as it affects so numerous a(prenominal) different parts of the Economy, including Economic growth, standard of sustenance and unemployment. There are three types of fanfare, depending on their actors. Firstly, hold pull pompousness occurs when in that location is an excessive center direct at or near practiced employment. If heap up read exceeds aggregate tack on, prices of gn s lift as a circumscribe mechanism. This miscellanea of pomposity is usually associated with periods of high economic activity.Secondly is follow- weight-lift ostentatiousness. If business be such as the woo of engrosss or materials pinch, businesses may aim to wield profit levels by passing these embodys onto consumers. This pass on firmness of purpose in high prices and therefore inflation. The utmost type of inflation is trade inflation. Imported inflation occurs when the price of imports try outs, and either adds to business costs (resulting in cost-push inflation) or feeds into the CPI as the price of net redeeming(prenominal)s. Furthermore, a depreciation in the Au$ exit raise import prices, withal adding to imported inflation.There are a number of factors which may precedent inflation in the Australian economy. A major cause of use up-pull inflation is excessive growth in aggregate demand. If aggregate demand increases from AD to AD1, aggregate supply which is the equivalent of really gross domestic product go away rise to GDP2 and the price level allow rise from P to P2. This results in the inflationary gap of cd. This increase in aggregate demand may be the result of a number of factors, including increases in consumption expenditure, investiture spending, net government expenditure, the money supply, or exportation incomes.An early(a) major cause of inflation, this time cost-push inflation, is a belittle in aggregate supply. If aggregate supply pass ups from AS to AS1, real GDP pass on decrease to GDP2 and the price level leave rise to P1. This results in twain a contraction in real GDP and a rise in inflation. The principal(prenominal) causes of this decrease in aggregate supply is excessive wage growth not accompanied by productiveness increase, a rise in the cost of fond materials, and other inputs, or a rise in government taxes or other charges that raise costs for firms.Cost-push inflation may too be the re sult of imported inflation it there is a rise in world prices of imported goods used in the production process (such as raw materials and median(a) goods) firms are likely to pass these costs onto consumers, resulting in inflation on the other hand if there is a rise in world prices of consumer goods, increase import prices go away feed directly into the CPI, also resulting in inflation. Furthermore a depreciation in the Au$ in foreign exchange markets leave result in a rise in the prices of imported raw materials, intermediate goods, and consumer goods, again lend to Australias inflation.This is demonstrated in the stimulus when the RBA credit the decrease in inflation to the fading dissemble of 2000s exchange rate depreciation. A less habitual cause of inflation is the existence of monopolies or oligopolies. If a monopoly or oligopoly exists in an industry, the lack of competition allows producers to push up prices. This again results in inflation. The final cause of inflatio n in Australia is inflationary expectations. Inflationary expectations parent to the behaviour of individuals and businesses who seek to compensate for the current inflation, as well as expected future price rises.This may be the result of either firms displace up prices, or wage earners seeking higher nominal wages. Also, if consumers expect future prices to rise, they rather buy gns now, which manoeuvers to increases in spending. This results in demand-pull inflation. Inflation support impact the economy in 3 ways. 1)By encouraging investment in forged and unproductive activities and discouraging investment in ventures considered productive. Inflation encourages investment in real assets such as notes and real estate because they are considered good shelters for inflation.This is because the scarcity of them often outpaces or at to the lowest degree keeps pace with the rate of inflation. If inflation occurs, people impart seek to own such assets, shifting resources to thes e inquisitive and unproductive assets. Similarly this discourages investment in other assets. This is because entrepreneurs give not think it is financially possible to invest and pursue a project that will only result in less profit, collectable to the higher costs of inflation. Similarly inflation increases the cost of production thus also discouraging entrepreneurs.For showcase, if inflation is high, people will invest in gold and real estate. Otherwise known as the hazard cost, because people will allocate their resources into such ventures (gold and real estate) they must then forego investing into other ventures that are considered productive such as a new business, that may be producing majuscule goods or normal goods and services. Also by discouraging entrepreneurs is the rise in the costs of production that occur collect to inflation, for example the raw materials.Similarly interest rates will rise, making it more expensive to borrow currency for investment purpose s, making investment projects less profitable. both way, inflation support cause a breathing out in production of capital goods, cartroading to lower living standards in the future, or a bolshie in the production of normal goods and services, leading to overweight current living conditions, as current ask and wants go unsatisfied. Since re deals from productive capital take time-consuming to materialise, it means that entrepreneurs are also faced with a lesser return.This means that if the rate of inflation is great than the return offered by the investment, then the project will not be considered economically viable, nor pricewhile. Similarly the put on the line of press release from any investment project will grow with inflation. Many small businesses take a couple of years before they start to misrepresent a profit, so if inflation is high, and is was not interpreted into account when the business was first planned, then the cost of production may rise, and the resul ting price for the commodity will be too high for consumers. ) If inflation is present and is greater than that afield, it reduces the afield competitiveness of the Australian economy. This is because inflation is not only associated with a rise in prices, but also an increase to the costs of production. hence making overseas exports cheaper to the domestic market. Similarly the overseas firms do not have to put up with the rises in the costs of production. This provides a leakage in the circular liquify (purchase of exports) and thus curb demand in the domestic market, which if severe enough could lead to a recession, bringing with it many economic problems.An example of how inflation force out lead to a recession, would be the 1970s, when high inflation averaged at 10. 4%. Which callable to the high oil prices and strong domestic demand light-emitting diode to high inflation in the eighties (8. 1%). This period of high inflation led to a dampening in spending and a recessio n in the 1990s (1990-1992) causing many problems such as unemployment. 3) It also creates many winners and losers in the economy. Those that benefit are the owners of real assets (real assets and gold), because their assets are worth more.As well as those belonging to well-organized groups who can demand wage increases (eg, strong trade unions. ) This can lead to rapidly rising wages, increasing the costs of production, and also discouraging investment in productive capital as mentioned above. In addition to this inflation can benefit people who have already borrowed money because the cost of refund, represent less as inflation rises. This is because inflation is defined by a loss in the real value of money, therefore the repayment will diminish over time.Conversely inflation disadvantages those on fixed incomes because they lose the real value of income as their money represents less purchasing power. Similarly for the kindred reasons it disadvantages those that keep their money in liquid form (ie, bank deposits). Also those that lend money befool less back in terms of repayment, referable to the loss in value (eg, A owe repayment in 1960 was worth more than in 1980, where high inflation had occurred).Also since it reduces international competitiveness, inflation can disadvantage exporters who find themselves with less business opportunities. This can effect the economy, as overseas markets will not purchase Australian goods and services. Therefore the economy will not receive the injection into the circular flow that it would usually, without inflation. Without the strong domestic support that is present in Australias economy, the economy could have the effect of dampening economic activity, and aggregate demand.When inflation occurs in the Australian economy it usually had a number of causes. The main causes are excess aggregate demand, cost-push inflation, inflationary expectations and imported inflation. inflation disadvantages many groups in the ec onomy, who in turn benefit other groups. This is because inflation can crop the allocation of resources in regards to encouraging and discouraging investment, the overseas competitiveness of the Australian market, as well as effecting individuals and firms, who often benefit at the expense of others.