This is the highest rise since the same time last year, with contributing factors like government schemes and home building grants. It also determines how easy it is for consumers and businesses to access bank financing, and should be considered in any cash flow forecasting for businesses.
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Breadcrumb Resources Finance. Table of contents. Understanding inflation rate Inflation figures relate to what you can buy with your money. For example, scanner data from supermarkets give information about the price and number of items a consumer buys in one transaction.
For other items, the ABS records prices either monthly, quarterly or annually. In total, the ABS collects around , prices each quarter. In deciding which goods and services to include in the CPI basket and what their weights should be, the ABS uses information about how much — and on what — households in Australia spend their income. If households spend more of their income on one item, that item will have a larger weight in the CPI. For example, the ABS included smart phones in the CPI to reflect consumers taking advantage of advances in technology.
Data on household spending across all items is only available approximately every five years or so. These indicators exclude items that have particularly large price changes either frequently or in a given quarter. Large price changes can often be due to temporary factors, which are sometimes unrelated to broad conditions in the economy. For example:. In contrast, price changes for a broad range of items may indicate a shift in economic conditions.
The Reserve Bank may decide to respond to this by changing interest rates see Explainer: Australia's Inflation Target. In Australia, the most important indicators of underlying inflation are the trimmed mean and the weighted median see Box: Calculating the Trimmed Mean and the Weighted Median. Prices of fruit, vegetables and fuel are usually very volatile because they are often affected by supply disruptions, such as unusual weather, or changes in how much oil is supplied to the world market.
The CPI excluding volatile items always removes the same items, while the items that are removed from the trimmed mean and weighted median can change each quarter, depending on which items had particularly large price changes. To calculate the trimmed mean and the weighted median, all 87 items are ordered by their quarterly, seasonally adjusted price change.
Seasonal adjustment means that price changes have been adjusted for increases or decreases that always occur at a particular time of year; for example, high school fees typically increase in the March quarter, so an adjustment is made to spread this out over the year. It is the weighted average of the middle 70 per cent of items. Weighted median is the inflation rate of the item at the middle of the price changes in the CPI basket the 50th percentile by weight.
The CPI measures the rate of price changes in the economy, but not the price level. If the price index of bread is and the price index of eggs is , it does not mean that eggs are more expensive than bread. Individuals need a big and diversified set of products as well as a host of services for living a comfortable life.
They include commodities like food grains, metal, fuel, utilities like electricity and transportation, and services like healthcare, entertainment, and labor. Inflation aims to measure the overall impact of price changes for a diversified set of products and services, and allows for a single value representation of the increase in the price level of goods and services in an economy over a period of time.
The U. Federal Reserve announced no change in its rate policy at its June meeting and did not signal concerns about rising inflation. As a currency loses value, prices rise and it buys fewer goods and services. This loss of purchasing power impacts the general cost of living for the common public which ultimately leads to a deceleration in economic growth.
The consensus view among economists is that sustained inflation occurs when a nation's money supply growth outpaces economic growth. To combat this, a country's appropriate monetary authority, like the central bank , then takes the necessary measures to manage the supply of money and credit to keep inflation within permissible limits and keep the economy running smoothly.
Theoretically, monetarism is a popular theory that explains the relation between inflation and the money supply of an economy. For example, following the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and especially silver flowed into the Spanish and other European economies. Since the money supply had rapidly increased, the value of money fell, contributing to rapidly rising prices.
An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy. Money supply can be increased by the monetary authorities either by printing and giving away more money to the individuals, by legally devaluing reducing the value of the legal tender currency, more most commonly by loaning new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market.
In all such cases of money supply increase, the money loses its purchasing power. The mechanisms of how this drives inflation can be classified into three types: demand-pull inflation , cost-push inflation , and built-in inflation.
Demand-pull inflation occurs when an increase in the supply of money and credit stimulates overall demand for goods and services in an economy to increase more rapidly than the economy's production capacity. This increases demand and leads to price rises. With more money available to individuals, positive consumer sentiment leads to higher spending, and this increased demand pulls prices higher. It creates a demand-supply gap with higher demand and less flexible supply, which results in higher prices.
Cost-push inflation is a result of the increase in prices working through the production process inputs. When additions to the supply of money and credit are channeled into a commodity or other asset markets and especially when this is accompanied by a negative economic shock to the supply of key commodities, costs for all kinds of intermediate goods rise. These developments lead to higher costs for the finished product or service and work their way into rising consumer prices.
For instance, when the expansion of the money supply creates a speculative boom in oil prices the cost of energy of all sorts of uses can rise and contribute to rising consumer prices, which is reflected in various measures of inflation.
Built-in inflation is related to adaptive expectations, the idea that people expect current inflation rates to continue in the future. As the price of goods and services rises, workers and others come to expect that they will continue to rise in the future at a similar rate and demand more costs or wages to maintain their standard of living.
Their increased wages result in a higher cost of goods and services, and this wage-price spiral continues as one factor induces the other and vice-versa. Depending upon the selected set of goods and services used, multiple types of baskets of goods are calculated and tracked as price indexes.
The CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of primary consumer needs. They include transportation, food, and medical care.
CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket. The prices in consideration are the retail prices of each item, as available for purchase by the individual citizens. Changes in the CPI are used to assess price changes associated with the cost of living , making it one of the most frequently used statistics for identifying periods of inflation or deflation. In the U. The Consumer Price Index has been revised six times.
The WPI is another popular measure of inflation, which measures and tracks the changes in the price of goods in the stages before the retail level. While WPI items vary from one country to other, they mostly include items at the producer or wholesale level. For example, it includes cotton prices for raw cotton, cotton yarn, cotton gray goods, and cotton clothing.
Although many countries and organizations use WPI, many other countries, including the U. The producer price index is a family of indexes that measures the average change in selling prices received by domestic producers of intermediate goods and services over time.
The PPI measures price changes from the perspective of the seller and differs from the CPI which measures price changes from the perspective of the buyer. In all such variants, it is possible that the rise in the price of one component say oil cancels out the price decline in another say wheat to a certain extent.
Overall, each index represents the average weighted price change for the given constituents which may apply at the overall economy, sector, or commodity level. The above-mentioned variants of price indexes can be used to calculate the value of inflation between two particular months or years.
While a lot of ready-made inflation calculators are already available on various financial portals and websites, it is always better to be aware of the underlying methodology to ensure accuracy with a clear understanding of the calculations. One can find price index data on various portals in a tabular form. From that table, pick up the corresponding CPI figures for the given two months. For September , it was Plugging in the formula yields:.
Inflation can be construed as either a good or a bad thing, depending upon which side one takes, and how rapidly the change occurs. For example, individuals with tangible assets that are priced in currency, like property or stocked commodities, may like to see some inflation as that raises the price of their assets, which they can sell at a higher rate. However, the buyers of such assets may not be happy with inflation, as they will be required to shell out more money.
Inflation-indexed bonds are another popular option for investors to profit from inflation. On the other hand, people holding assets denominated in currency, such as cash or bonds, may also not like inflation, as it erodes the real value of their holdings. Investors looking to protect their portfolios from inflation should consider inflation-hedged asset classes, such as gold, commodities, and real estate investment trusts REITs.
Inflation promotes speculation, both by businesses in risky projects and by individuals in stocks of companies, as they expect better returns than inflation.
An optimum level of inflation is often promoted to encourage spending to a certain extent instead of saving. If the purchasing power of money falls over time, then there may be a greater incentive to spend now instead of saving and spending later.
It may increase spending, which may boost economic activities in a country. A balanced approach is thought to keep the inflation value in an optimum and desirable range. High and variable rates of inflation can impose major costs on an economy.
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