Deflation v disinflation   Why inflation is bad   Goal of low inflation   Why the RBA targets 2-3%   Measurement of inflation    Headline v underlying   Inflationary expectations   Economicstutor..com.au

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 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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why inflation is bad


High inflation has a number of negative effects on the economy and living standards more generally. When inflation is too high (e.g. above 3%) it will make it increasingly difficult to achieve other economic goals (e.g. external stability, economic growth, full employment, and equity in the distribution of income) that are necessary for living standards to be maximised.  Accordingly, the government recognises that once Australia achieves low inflation, it has established an economic environment that is conducive to the achievement of all economic goals.  For example, a high rate of inflation will reduce Australia's international competitiveness, reducing net exports and AD, which then reduces economic growth and tends to increase the rate of unemployment.  This ultimately has a negative impact on both material living standards (via relatively less incomes being earned) and non-material living standards (via loss of self-esteem and purpose to the newly unemployed).


 More generally, relatively high rates of inflation will tend to have the following negative effects on the economy which all ultimately result in lower rates of economic growth or equity concerns.



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