Inflation

__**Inflation Notes**__ Inflation rate = __CPI 2nd year – CPI 1st year__ CPI 1st year Inflation - Inflation is a sustained increase in the general level of prices in an economy. The best-known and most widely used measure of inflation in Australia in the percentage change in the Consumer price index (CPI)
 * Cost-push:** Cost Push inflation is caused by an increase in the costs of the factors of production. When production costs rise, firms attempt to pass them on to consumers by raising the prices of their products. Major sources of cost push inflationary pressures in the Australian economy include oil prices and wages.

__**Demand-Pull Inflation:**__ Demand inflation occurs when aggregate demand exceeds the productive capacity of the economy, or aggregate supply, and prices rise as a rationing mechanism within the markets. it is associated with periods of high economic activity and occurs as the economy approaches full employment of resources.

__**Negative effects of inflation:**__

- High inflation will distort consumer decisions to spend or save disposable income - reduces purchasing power of their money.

- High inflation à wage price inflationary spiral (where wage increases lead to higher prices à leading to higher wage demands – and so on.)

- High inflation have negative impact because lower income earners find that their incomes do not rise as quickly as general prices.

- The value of people’s savings erodes à decline in wealth.

- High inflation = increased prices = more expensive Australian exports = less international competitiveness.


 * __Positive effects of inflation:__**

- High inflation reduces the likelihood of the economy experiencing falling prices.

__ **The Phillips Curve:** __
 * ** Shows the trade-off governments face in trying to simultaneously achieve low inflation and low unemployment **
 * While higher economic growth creates jobs andreduces unemployment, it can lead to excessive demand – pushing up prices
 * It creates demand in labour market à increase in wage à add to inflation
 * The trade-off between low inflation and low unemployment was an important part of macroeconomic policy
 * Although the government may be able to reduce inflation in the short term, this will result in higher unemployment.
 * In the **Long Run Phillips’ Curve (LRPC)** there is no such trade off and the unemployment at this point represents the natural rate of unemployment.


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