Inflation - A long term view
My interest in inflation began during my MBA and deepened in my first pricing analytics role, where I saw firsthand how businesses must adjust prices to maintain profitability amidst rising costs. Inflation, simply put, is the rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power. It affects everyone, from individuals trying to maintain their savings to businesses navigating price adjustments. A simple example highlights inflation's impact: remember the 1 and 2 cent coins? As a kid, they were viable currency, but inflation gradually eroded their value until the cost of the copper they contained outweighed their purchasing power, leading to their eventual phase out. More recently, Covid stimulus measures injected significant amounts of money into the economy, boosting demand and contributing to a surge in inflation. This surge has captured headlines as central banks attempt to curb it through monetary policies, such as raising interest rates, which can increase the burden on borrowers.
But what if we step back and look at the bigger picture? The chart below presents a 70-year view of inflation in Australia, providing valuable context for recent trends.
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Historical Context: Peaks and Troughs
While the recent inflation spike related to Covid stimulus measures exceeded the long-term average, it's crucial to remember that Australia has experienced far worse periods of inflation. Factors contributing to these past spikes include the Korean War in the 1950s, oil price shocks in the 1970s and 1980s, commodity booms, and loose monetary policies. However, over the last 25 years, Australia has generally managed to keep inflation under control, with exceptions like the introduction of the Goods and Services Tax (GST) in 2000 and the global resources boom in 2007-2008.
Key Takeaways and Future Considerations
This long-term view underscores the dynamic nature of inflation. While recent spikes have caused concern, they are not unprecedented. Understanding the historical context and the various factors influencing inflation can help individuals and businesses make informed decisions. Further analysis could explore:
- Inflation's impact on specific sectors: How does inflation differentially affect various industries?
- Effectiveness of monetary policies: How effective are different monetary policy tools in controlling inflation?
- Global inflation trends: How does Australia's inflation compare to other countries, and what are the global implications?