Inflation and unemployment

In
general terms, inflation is the general rise in the price level of goods and
services 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 of
money in the market. With growth in money supply, it provides more money for
investors and consumers to spend. As consumers have more money in hand, the
demand rises, leading to inflation. Unemployment, additionally, is a time frame
where an individual is either without a job, looking for a job or currently
available for work. Among others, inflation and unemployment rate are two main
markers of an economy.

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The
relationship between inflation and unemployment rate can be explained through
what is known as the Philip’s curve. The explanation behind Philip’s curve
points out that as unemployment level decreases, inflation rises. This curve
greatly helps to propose a probable economic model – fiscal and monetary policy
to 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 has
quite proven not to support the claim.

There
are certain cases where inflation can be the cause for rise in unemployment
rates. Firstly, due to an ambiguity of inflation, it leads to slower economic
growth and lesser investment in the economy. Fluctuating inflation rates often
tends to bring about booms and busts in the economy. Another possibility could
be the lack of competitiveness in the export sector due to rise in inflation,
promoting lower demand of goods and services.

According
to Australian Bureau of Statistics, inflation rate of Australia for September
quarter 2017 was 1.8% indicating a lower than expected rate mainly due to a
fall in the prices of goods and products but on the other hand prices on
housing and transport kept on increasing significantly. The unemployment rate
reached up to 5.5% in December 2017.

Making
a comparison of both the charts in terms of inflation and unemployment we can
make a reliable estimate of the relationship between inflation and
unemployment. The line graph below depicts the inflation rate of Australia from
1990 – 2015.

From
the graph, it can be clearly seen that the inflation rate has significantly
reduced in the 2000’s as compared to that of 1990. The year 1990 seems to have
experienced highest percentage of inflation rate in the 15-year time interval
with more than 7%.

Comparing
the inflation rate chart with that of the unemployment chart below, it can
clearly be seen that when inflation is highest in the year 1990, unemployment
rate is just 7%, whereas when inflation is 0.98% in 1992, unemployment rate is
highest at 10.8%. This shows an inverse relationship between inflation and
unemployment rate.

Monetary Policy

Reserve
Bank of Australia (RBA) oversees Australia’s monetary policy. On the verge of
shaping the monetary policy, RBA is accountable to maintain stability in price,
keep the inflation rate low and aim for full employment. In Australia, RBA has
initiated to what is called as the “inflation target” – where a certain target
is made and efforts are made to level up the rate to the target point. Control
or proper balance over inflation helps the economy to operate at a particular
level with lower fluctuations and boosts sustainable growth. The RBA allocates
or decides upon what is known as the cash rate. Cash rate is the rate at with
other banks and financial institutions can borrow funds from RBA. The cash rate
acts as a strong stimulus to determine interest rates. Hence, if the cash rate
is low, it often implies that there will be increased money supply in the
economy leading to higher inflation. Therefore, the RBA generally would
increase the cash rate if the inflation typically remains at a higher level and
vice versa. In terms of employment, the slow growth in wages of employees
around the country is leading to a prolonged version of inflation rate below
the inflation target. Improvement in policies such as greater investments on
labor force, education and wellbeing along with a strong macro-economic
environment will provide Australia with provision to achieve lower unemployment
and greater degree of workforce participation.

From
above information, we can see that, In the year 1990, 1991, 1992 it has greater
interest rate 7.5 to 17 %, which made the investors to borrow less from the
bank 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 GDP
growth rate fell from 3.8 in 1990 to negative 0.38 in 1991 and only 0.44 in
following year. Thus, we can conclude that the monetary policy had been tighter
for those years.

 

 

 

 

 

 

Future of Australian economy

Talking
about the Australian economy, it has always been good on its own. Also, it can
be said that the country has worthy projections in terms of growth for the long
term period. With a blend of strong workforce, population and institutions, the
country has an advantage to be called as a fast paced developing country.

 

From
the figure it can be seen that the GDP growth rate forecast of Australia is
quite constant over the period until 2020. This depicts that the economy will
run as per it has in the present condition without much fluctuations. But on
the other hand, comparing the beforehand forecasts for 2020, the growth rate
was forecasted to have been increased by 3% (predicted on March 2017).

According to IMF, drop in the forecast can be made responsible to bad weather
which led to slow-moving investments in housing and mining.

 

Also in
terms 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 year
2020, which shows a positive result.

 

One of
the main aspects that determines the economic stability of a country is its
inflation rate. Within two years’ time, the inflation rate will seem to have
been increased by 0.4%, which is quite good because it is a challenge to
maintain inflation at a specific rate. But inflation is always a variable
factor and many factors determine the stability of inflation. Competitive
pressures in the retail industry, unemployment and underemployment in the
market etc. affects the rate of inflation Australia holds.

Looking
at the GDP annual growth rate, it suggests to us that although the growth rate
will predict to be a little lower in the year 2018, by 2020, it will get back
to 2.9%. In general, it could be conferred that the growth rate will remain
constant.

Looking at the
efforts of the government, according to the statements of the Budget Release
for 2017-18, the government has adopted medium-term fiscal plans to achieve
surplus for the economy. The plans and policies includes focus on making
investments with higher returns in terms of productivity and workforce
participation. Furthermore, government has also stressed upon focusing on those
policies 

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