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Effects of Inflation on Economies
Summary: The effects of low and high inflation rates on the economy. Low inflation has a long-term impact on economies and the stability of currency and investment. Inflation causes economic distortions by reducing the competitiveness of exports growth and may increase the purchase of imports, worsening the goods and services component. High inflation eats into investment returns, encouraging investors to shift to short-term speculative investments rather than long-term investments in new productive capacity and technological progress of economic activity. This reallocates resources away from productive activities and producers postpone investment decisions due to uncertainty about future costs of inputs and their impact on consumer demand.
Inflation is a sustained rise in the general level of prices in an economy. The Consumer Price Index (CPI) summarises the movement in the prices of a basket of goods and services. It is an important economic indicator identifying the cost of living in Australia thus changes in inflation mean that the cost of living is rising resulting in a possible deterioration of living standards. Australia's average inflation rate (2.4%) over the last decade is within the RBA's target range of 2-3% and in March, 2004 CPI increased by O.9, 2.0% over the year. Long term low inflation or price stability is crucial for internal and external economic stability and competitiveness and this is why inflation has been a high priority for economic management in the past decade.
Low inflation is central to the government's concerns because of the long-term impact it has on the economy, stability of the currency and...
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This section contains 552 words (approx. 2 pages at 300 words per page) |
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