By Harguan Kaur
Guys! Sound the emergency bells, inflation is at a whopping 7%! Oh no! Quickly, someone call the RBA, it is chaos over here!
I’m sure that’s the reaction you’ve been seeing on the news lately, and honestly, how does one sound the warning bells if they don’t even know why they are ringing? But luckily for you, here’s an explanation for why those bells are on, and tips to turn them off.
Firstly, we must understand what inflation is. Simply put, the reason why prices are currently skyrocketing is due to an increase in consumer confidence and spending. But where has this increase come from? (HINT: it starts with CO and ends with VID.)
Basically, everyone in lockdown was so bored and wishing they could spend money on something— and unless you’re like me and investing in an unhealthy amount of junk food, you didn’t have an avenue to spend your money. So, once the lockdown was over, the floodgates opened and spending skyrocketed! And this completely unexpected influx of cash caused the economy to be so overwhelmed and resulted in the value of the Australian dollar (AUD) decreasing, hiking up inflation.
Not fun right…the higher the inflation rates the higher prices of goods/services go! And trust me, inflation can get pretty bad. A good example is Zimbabwe which a while back experienced hyperinflation, something as bad as it sounds. In May 2008, 1 USD = 758 530 000 000 Zimbabwe dollars, so it’s no surprise Zimbabwe was issuing what was called the ‘Special Agro-Cheque” worth one hundred BILLION Zimbabwe dollars.
But luckily, it’s not that bad here. In fact, inflation is reducing from 7.8% in the March quarter to 6.0% in the June quarter. Seems like it’s going great but does that mean we can turn the emergency bells off?
Well…short answer: no. The long answer is that we can turn the bells off once we reach the ideal, RBA-approved inflation rate which is the low 2–3%. This inflation rate is ideal because it means that the economy can grow AND prices can stay low.
A win-win situation.
So, how can we get the inflation to the low 2–3% range, well the answer is simple. We need to reduce consumer spending. And this can be done through something I will explain in the next issue: the ominous cash rate/monetary policy. But by reducing spending the economy is left less overwhelmed and inflation can decrease YIPPEE!
And more good news! By 2024 inflation is expected to return to the magic 2–3%! So don’t worry guys, the emergency bells will stop ringing soon.
