Inflation and unemploymentIngeneral terms, inflation is the general rise in the price level of goods andservices in an economy. Inflation is measured using the Consumer Price Index(CPI), which the main cause of inflation can be traced back to higher supply ofmoney in the market. With growth in money supply, it provides more money forinvestors and consumers to spend. As consumers have more money in hand, thedemand rises, leading to inflation.
Unemployment, additionally, is a time framewhere an individual is either without a job, looking for a job or currentlyavailable for work. Among others, inflation and unemployment rate are two mainmarkers of an economy. Therelationship between inflation and unemployment rate can be explained throughwhat is known as the Philip’s curve.
The explanation behind Philip’s curvepoints out that as unemployment level decreases, inflation rises. This curvegreatly helps to propose a probable economic model – fiscal and monetary policyto attain full employment either at a higher price level or on the other hand,lower the employment for lowered inflation. But, in reality, the curve hasquite proven not to support the claim. Thereare certain cases where inflation can be the cause for rise in unemploymentrates.
Firstly, due to an ambiguity of inflation, it leads to slower economicgrowth and lesser investment in the economy. Fluctuating inflation rates oftentends to bring about booms and busts in the economy. Another possibility couldbe the lack of competitiveness in the export sector due to rise in inflation,promoting lower demand of goods and services. Accordingto Australian Bureau of Statistics, inflation rate of Australia for Septemberquarter 2017 was 1.
8% indicating a lower than expected rate mainly due to afall in the prices of goods and products but on the other hand prices onhousing and transport kept on increasing significantly. The unemployment ratereached up to 5.5% in December 2017. Makinga comparison of both the charts in terms of inflation and unemployment we canmake a reliable estimate of the relationship between inflation andunemployment. The line graph below depicts the inflation rate of Australia from1990 – 2015. Fromthe graph, it can be clearly seen that the inflation rate has significantlyreduced in the 2000’s as compared to that of 1990. The year 1990 seems to haveexperienced highest percentage of inflation rate in the 15-year time intervalwith more than 7%. Comparingthe inflation rate chart with that of the unemployment chart below, it canclearly be seen that when inflation is highest in the year 1990, unemploymentrate is just 7%, whereas when inflation is 0.
98% in 1992, unemployment rate ishighest at 10.8%. This shows an inverse relationship between inflation andunemployment rate.
Monetary PolicyReserveBank of Australia (RBA) oversees Australia’s monetary policy. On the verge ofshaping the monetary policy, RBA is accountable to maintain stability in price,keep the inflation rate low and aim for full employment. In Australia, RBA hasinitiated to what is called as the “inflation target” – where a certain targetis made and efforts are made to level up the rate to the target point. Controlor proper balance over inflation helps the economy to operate at a particularlevel with lower fluctuations and boosts sustainable growth. The RBA allocatesor decides upon what is known as the cash rate. Cash rate is the rate at withother banks and financial institutions can borrow funds from RBA. The cash rateacts as a strong stimulus to determine interest rates. Hence, if the cash rateis low, it often implies that there will be increased money supply in theeconomy leading to higher inflation.
Therefore, the RBA generally wouldincrease the cash rate if the inflation typically remains at a higher level andvice versa. In terms of employment, the slow growth in wages of employeesaround the country is leading to a prolonged version of inflation rate belowthe inflation target. Improvement in policies such as greater investments onlabor force, education and wellbeing along with a strong macro-economicenvironment will provide Australia with provision to achieve lower unemploymentand greater degree of workforce participation.
Fromabove information, we can see that, In the year 1990, 1991, 1992 it has greaterinterest rate 7.5 to 17 %, which made the investors to borrow less from thebank and other financial institution. Where it affected the domestic production,and resulting fall in real GDP for next year. AS we can see from the data GDPgrowth rate fell from 3.8 in 1990 to negative 0.38 in 1991 and only 0.
44 infollowing year. Thus, we can conclude that the monetary policy had been tighterfor those years. Future of Australian economy Talkingabout the Australian economy, it has always been good on its own.
Also, it canbe said that the country has worthy projections in terms of growth for the longterm period. With a blend of strong workforce, population and institutions, thecountry has an advantage to be called as a fast paced developing country. Fromthe figure it can be seen that the GDP growth rate forecast of Australia isquite constant over the period until 2020. This depicts that the economy willrun as per it has in the present condition without much fluctuations.
But onthe other hand, comparing the beforehand forecasts for 2020, the growth ratewas forecasted to have been increased by 3% (predicted on March 2017).According to IMF, drop in the forecast can be made responsible to bad weatherwhich led to slow-moving investments in housing and mining. Also interms of unemployment, Q4 of 2018 seems to have the highest rate in 2 years’time with an unemployment rate of 6%. This rate will fall to 5.6% in the year2020, which shows a positive result. One ofthe main aspects that determines the economic stability of a country is itsinflation rate.
Within two years’ time, the inflation rate will seem to havebeen increased by 0.4%, which is quite good because it is a challenge tomaintain inflation at a specific rate. But inflation is always a variablefactor and many factors determine the stability of inflation. Competitivepressures in the retail industry, unemployment and underemployment in themarket etc. affects the rate of inflation Australia holds. Lookingat the GDP annual growth rate, it suggests to us that although the growth ratewill predict to be a little lower in the year 2018, by 2020, it will get backto 2.
9%. In general, it could be conferred that the growth rate will remainconstant. Looking at theefforts of the government, according to the statements of the Budget Releasefor 2017-18, the government has adopted medium-term fiscal plans to achievesurplus for the economy.
The plans and policies includes focus on makinginvestments with higher returns in terms of productivity and workforceparticipation. Furthermore, government has also stressed upon focusing on thosepolicies