19th Feb

Tackling Inflation in Australia: Why It's Important

  • article
  • 3 mins

Inflation can have a significant negative impact on the Australian economy, but it is essential that measures are taken to ensure inflation remains within a manageable range in order to preserve people's purchasing power and savings.

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Inflation is the sustained increase in prices of goods and services over time. Inflation occurs when there is too much money circulating in an economy relative to what is available for sale; this results in each dollar then carrying less value, making it difficult to purchase things. In Australia, we feel the effects of inflation through higher prices for items such as food and transportation.

Although some level of inflation is required to ensure our economy continues to grow, uncontrolled inflation can have a significantly negative impact on the economy. As prices rise, households face greater difficulty affording basic necessities, leading to decreased purchasing power and a decrease in overall economic activity. Additionally, when businesses experience rising costs associated with inflation they may not be able to pass those extra costs onto their customers, which could lead to lower profits or even losses. The flow on effects of this can potentially result in job losses and a decrease in overall wages, further compounding these negative effects on the economy.

Further to this, inflation can reduce the value of savings held by individuals and households. This is because when prices are rising, the purchasing power of each dollar have is going down over time. For example, if you have $1000 saved up today but inflation increases by 4%, then after just one year that same amount of money would be worth only $960 in today's terms. As such, uncontrolled inflation (in Australia, that is considered inflation over 3%) can erode away everyone's ability to save for their future and limit their purchasing power ongoing.

Check out our podcast on inflation

Listen to our recent podcast on inflation and possible alternate strategies that could also be used alongside interest rate rises to keep it within manageable levels.

In order to combat increasing inflation in Australia, the Reserve Bank of Australia (RBA) takes into account various measures such as interest rates and other forms of monetary policy. These measures are designed to control demand and unemployment levels within the economy. However, in order to ensure that inflation remains within a manageable range and does not accelerate, it is also essential that the government takes measures such as introducing fiscal policies to further manage demand levels. This can be done by adjusting taxes or increasing spending on public services.

Overall, inflation can have a profoundly negative impact on the Australian economy if it is not managed effectively. The RBA and government both play an important role in controlling inflation by introducing complementary fiscal and monetary policy measures. Taking these into account can help ensure that prices remain stable while preserving people’s purchasing power and savings and hopefully benefit all Australians in the long-term. As such, although they can be feel painful now, it is essential that measures, such as interest rate rises, are taken to keep inflation within a manageable range and save Australians from further pain in the future.

Interested in learning more about inflation and how it affects the Australian economy?

Investor Intelligence recommends exploring the Reserve Bank of Australia's website about what the RBA is doing to tackle inflation, what they are predicting for the Australian economy in the next few years and what is impacting rising inflation within Australia.

Additionally, you may also benefit from speaking with a financial advisor who can provide further insights and advice on managing the effects of inflation on your own unique situation.

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