Inflation Case
Introduction:
Recently, Australia has been experiencing a general prices increase caused by many factors. The main cause is the soaring international oil prices and the Queensland flood and cyclone. This has caused an increase in the interest rate as well as the Australian dollar (The Sydney Morning Herald 2011).
Model
“Inflation rate is the percentage increase in the average prices of goods and services in the economy from one year to the next”. This means that every dollar will buy a smaller percentage of goods and services. For example, if the inflation rate is 3%, then $1 bottle of water will cost $1.03 in a year. The Australian Bureau of statistics measures inflation rate by putting a number of goods that are representative of the economy into a market basket. Over time, the cost of the basket is then compared. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year (Garnett et al. 2010).
The Reserve Bank of Australia’s objective is to control the inflation rate throughout its monetary policy. The monetary policy aims to achieve its target, which is an inflation rate of 2-3 per cent per annum (Garnett et al. 2010).
Analysis
As mentioned above, the inflation rate could be calculated through the CPI. The CPI uses numbers from the market basket to calculate the inflation rate.
For example:
CPI= Expenditures in the current year X 100
Expenditure in the base year
Therefore, an increase in any good in the basket will affect the inflation rate. The article stated that the oil prices are the biggest contributor to inflation by a 9% rise. Also, there were an increase in the price of bananas and vegetables by 100% and 16% respectively (The Sydney Morning Herald 2011).
The example below explains how to interpret values from the CPI in order to get the inflation rate:
For example:
Year 2008 Year 2009
CPI = 113 CPI= 110
Inflation rate= (113-110) X 100 = 2.73%
110
As mentioned earlier, as a result of the increase in the prices of the market basket, the inflation rate increased. In other