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How does inflation in the U.S. affect Australia?

The U.S. is experiencing its highest levels of inflation in the last 30 years. Inflation can be quite complicated, so we’re taking you through what it means, and if it affects Australia. 

Firstly, what is economic inflation? 

It’s the rise in prices over time, or a decrease in the purchasing power of the consumer (you and me) over time. The prices of items are going up, and the purchasing power of money in the hands of the consumer is not. Inflation can occur for multiple reasons including (but not limited to) the printing of more money, the general price increase of goods and services and an increase in demand for goods. This is, however, quite a simple explanation of inflation and if you want to learn more, click here.   

It’s also important to note that inflation is not always a bad thing, and can sometimes be encouraged, as long as it is closely monitored. 

So what has happened in the U.S? 

Data from late last week showed the consumer price index (CPI) in the U.S. rose by 6.2% in the last 12 months to October. Let’s break down what this means.

Consumer price index = A measure of price changes. It measures the change in price that consumers pay for a basket of consumer goods and services. What on earth is a basket you ask? A basket is a fixed set of goods and services like basic food and beverages, housing costs, apparel, transportation expenses, medical care costs and more. 

The rise in CPI gives us an indication of significant inflation. However, the current wage growth is not matching the rise in CPI, meaning consumers are paying more, but not earning more. 

Why is this happening? 

Again, there are many reasons for why inflation is soaring in the U.S.

Most of the reasons relate to the pandemic in one way or another. The U.S. has printed more money than usual to pay for the stimulus (COVID-19 welfare payments and business support payments) and the consequences of the pandemic. With more money circulating, the price of consumer goods (stuff) has risen (inflation), as there is excess money around which bids up the prices of goods. As people have been getting back into work (as industries have been reopening), the demand for consumer goods increased quickly, but supply did not match. 

Then there is the added pressure of the ongoing global supply chain issues. Don’t know what that is? You can read about it here. Simply put, the increased demand and lack of supply for goods and services (due to the shortages) are further causing inflation. 

Does it affect Australia? 

It does, but not as directly as in the U.S. While Australia has not seen inflation the way the U.S. has, there has been a general rise in prices with data from the September quarter showing Australia has seen a 3% increase. Most notably, fuel prices have seen a 36% increase since April last year. It will be up to the Reserve Bank of Australia to keep track of inflation, and ensure it remains at the target of around 2-3%.

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