The annual figures for headline inflation have been released for quarter 2 in 2021 and inflation has increased to 3.8%.
So does that mean we're beyond the goal of low inflation because the target band is 2-3% of general price levels increasing? Well in short, no. We care about price levels increasing at 2-3% on average, over time. So a single measurement beyond the target range does not create a need to panic.
If we average out inflation over the past few years we're still going to be hovering below that 2% mark. Not only that but this current surge in inflation is mostly related to many goods and services bouncing back to their regular price levels after the deflation that was caused during the peak of the COVID-19 pandemic. When looking at the figure for the underlying inflation rate (which removes the impacts of volatile price changes) it only actually increased to around 1.75%.
Another factor which makes this surge in the inflation rate somewhat of an anomaly is that widespread lockdowns have occurred across Australia during quarter 3 already and therefore it is likely that economic activity has plummeted and pressure on general prices is likely to do the same.
The main take away from this whole situation is that you cannot use this new measurement to claim that we are now exceeding the goal of low inflation and therefore contractionary budgetary policy and less expansionary monetary policy are needed. Many students will fall into that trap and will not be able to access full marks because of it.
Do you want more tips like this? Think about signing up to my Unit 3&4 Revision Lecture below!