After the increase in interest rates this week there has been a lot of discussion about the government's domestic macroeconomic goals and whether or not they are currently being achieved. So here's a little bit of analysis on the current data and how that ties into our definitions of each of the Government's goals studied in VCE Economics.
The Goal of Low Inflation:
The goal of low inflation states that the general levels of prices are rising at a rate of 2-3% on average over time. On average over time is a fairly vague way of saying over the past few years or over an economic cycle.
When we look at the recent changes in the inflation rate we can see that due to the past 4 quarterly measurements which have been released, we're now at a point where on average inflation has likely been trending towards being above the 2-3% target range. However, if we look at this purely from a mathematical standpoint and add all of the quarterly rates together and divide by 12 for the past 3 years. The average headline inflation rate is 2.09% which is right at the bottom end of the target range (obviously skewed by the impacts of the pandemic however). So technically you could argue that the goal of low inflation is currently being achieved, however current trends are pointing towards a situation where we are likely to be beyond the target range soon (which is why the RBA took preventative measures by increasing the cash rate).
The Goal of Strong and Sustainable Economic Growth: The Goal of SSEG states that we should have the highest growth rate possible without causing any unnecessary inflationary, external or environmental pressures. A rate of 3-3.5% real GDP growth per annum. This means that not only do we aim to have an annual growth rate between that target range, it also means that inflation should not be increasing at a rate which is too fast (due to the impact that is likely to have on aggregate demand) and that we are not depleting our natural resources at a rate which is too fast.
If we look at the recent data for annual rates of GDP growth in Australia we are currently at 4.2% Real GDP growth which is obviously above the 3-3.5% target range and therefore means technically numerically we are not achieving the goal. This number is however slightly exaggerated by the impacts of the reductions in growth which occurred during the lockdowns in 2020 and 2021. Due to data points being directly compared to a year where production shrank, any increase in GDP growth looked enormous by comparison. Therefore a growth rate of 4.2% is unlikely to be unsustainable in the long term and growth rates are likely to naturally trend back towards the target range. The current inflation rate of 5.1% could be considered unnecessary inflationary pressures however which puts the achievement of the goal more into question (especially if inflation continues trending upwards in 2022).
The Goal of Full Employment:
Is to maintain the lowest rate of unemployment possible without causing unnecessary inflationary pressures where only around 4.5% of natural unemployment exists. (NAIRU - Non-accelerating inflationary rate of unemployment). The currently unemployment rate of 4% and predictions that it will fall to 3.5% are a large focus of the current government in their boasting of a strong economy, however these numbers are relatively flawed due to the definition of employment being working 1 or more hours in the survey week, as well as the increase in hidden unemployment which has occurred during the past few year.
As you can see from the data from the last 12 months, unemployment really has been around 4.5% as is set within the goal. Therefore from the numerical standpoint the goal of full employment could be considered to be achieved, however much like the goal of strong and sustainable economic growth, the current rising inflationary pressure means that the achievement of the goal could be brought into question.
So what's the take away from all of this? Well we are currently in relatively unfamiliar economic times when it comes to the domestic macroeconomic goals, and therefore it becomes really important for a high level student to be really critical of the data that they are presented with to justify with logic and reasoning whether or not the goals are being achieved.