RBA measures:
Excluding volatile items
Trimmed mean (middle 70% of p changes)
Weighted median
Inflation
% change in the CPI over some period
From previous quarter
From corresponding quarter in previous year
Deflation
7
Inflation is costly
Shoe-leather costs
Noise in the price system
Tax system distortions bracket creep
Unexpected redistribution of wealth
Distorts firm and household decisions
Menu costs
Reduces real value of debts
reboot the economy after a debt binge!
8
Source: www.rateinflation.com
10
15.44
16.84
6.79
7.06
3.91
3.98
Housing
19.53
22.30
House contents/serv.
9.61
9.10
Health
4.70
5.29
Transport
13.11
11.55
Communication
3.31
3.05
Recreation
11.55
12.56
Education
2.73
3.18
Finance/insurance
9.31
5.08
11
6/10-6/11
6/11-6/12
Food
6.1
-3.2
5.6
3.8
1.1
0.6
Housing
4.6
3.4
House contents/serv.
0.1
0.7
Health
4.0
3.6
Transport
3.5
2.1
Communication
0.4
0.9
Recreation
-0.3
-1.6
Education
5.9
6.1
Finance/insurance
4.2
2.9
Total
3.6
1.9
12
14
15
r i
Where,
i = the nominal interest rate
= the inflation rate
17
1st Oil
Shock
2nd Oil
Shock
91
Rec.
9/11
GFC
18
20
23
Some Definitions
Y=C+I+G
national income = total expenditure
S=Y-C-G
national saving
S=(Y-T-C)+(T-G)
T=taxes
National saving=private + public saving
24
25
Source: Allen Consulting Group 2007
26
Source: Allen Consulting Group 2007
Maybe not
27
Source: Allen Consulting Group 2007
Global Imbalances I
30
Source: Prasad (2009) Finance and Development
Global Imbalances II
AFC
GFC
31
Life-cycle saving
Precautionary saving
Bequest saving
The real interest rate
Financial innovation
Financial deregulation
Asset price booms
33
r*
I
I*=S*
S, I
34
r*
r*
I
I
I*=S* I*=S*
S, I
35
r*
r*
I
I*=S*
I*=S*
S, I
36
Yes
Benefit=6000-1200-4400=400 > Cost=240
37
Conclusion
You should now be able to discuss:
What is inflation? How is it measured?
Inflations link to interest rates.
Australias savings performance
Why are national savings important?
The link between S, I and the real interest
rate.
38